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Current time:0:00Total duration:14:29

Video transcript

in the last offer in the last video not the last offering I guess it was a bit of both we had completed our Series B we had gone back to the tail got another round of venture capital funding and we raised ten million more dollars that's going to help us build out the website and do some marketing and hire up some more engineers and other employees and to do that we had to sell one really insurance we essentially sold them at ten dollars a share and so after that offering all our pre-money valuation was thirty million and our post money is now 40 million 40 million 40 million that's the value of our assets as I mean you know these you know the website that's kind of an arbitrary valuation and and I've gotten a letter asking well how do you value that and that's a whole subject for another playlist and I will do that I will do a whole playlist on valuation eventually but but but to get there the first thing to understand is just a capital structure and how capital markets work in general so that's what we're doing here but anyway so after you got the ten million dollars you have 30 million before you get 10 million your post money is 40 million and we have to issue a million extra shares to do it so before the money we had three million and now we have four million shares so let me draw what our balance sheet looks like so we already had we had a million dollars and then we raised ten million more so if we look at the left-hand side of our balance sheet we have 11 million in cash 11 million in cash and we have our website and intellectual property maybe we have some patents now so you can say you know assets of the firm I guess you could say non-cash assets right that's cash non-cash assets and some of them could be intangibles like branding or maybe we made some small acquisitions of other people and well we'll do more videos and actually the mechanics of acquisitions and all that but you get the idea these are all of the other assets of the firm whatever they may be and then on the equity side because we have no liabilities so in this case assets will be equal to equity on the equity side of the equation we just have 4 million shares 4 million shares 1/4 went to the series B guy right Series B one-fourth went to the series a guy he had bought a million dollar million shares I think was at 750 or share then the angel investor had given us a million shares it and I think it was 5 dollars a share that was the angel and then there's me and my buddies that we we split the last that first million shares 5 ways and if I wanted to draw my sliver I still have my 200,000 shares 200,000 shares and we could keep doing that we could get a Serie C in a series d that'll keep us going but let's say that that a couple of other a couple of other people have decided to sell socks on the Internet and we realize that this is good becoming a very competitive space and we really wanted to just lay down the gauntlet and and make sure that ours is the dominant player because we figured that whoever gets the biggest market share fastest is going to become the amazon.com and everyone else is going to turn into you know these me two players and they're all going to go out of business so size has benefits in this situation so we don't want to do these piddly you know 10 million dollar offerings and and 20 million dollar offerings we want to go big-time we say you know what we're going to expand our company huge we're going to we're going to push marketing hard and so we want to raise a lot of money let's say let me make up a number let's say we want to raise I don't know we want to raise 50 million dollars 50 million dollars to invest in the business to do some hardcore marketing and it happens to be the time let's say it's 1999 the stock market is racing ahead people people would love to get in on this kind of stuff so we said hey let's do an initial public offering and that has two benefits one we'll be able to raise a lot of money for the firm to invest in you know maybe building distribution centers or the marketing that I talked about and then the other side benefit which you know we won't really talk about much at the board meeting but all of these people right now they're all holding these shares right I have these 200,000 shares this angel investor has this million shares and there's really not a lot they can do with them right maybe this you know maybe the angel investor maybe he has some maybe he had a expensive divorce settlement and he has to make some alimony payments now and he doesn't really have the cash he can't do anything with these shares right same thing with these VCS these VCS are accountable to their investors and you know they can say like this VC could say oh you know what I bought those shares at 750 per share and then this guy came and bought it at $10 per share so I already got a 33% gain on my investment but the investors aren't that impressed by that because you're still holding the shares you can't really say they're worth $10 until you actually turn them into $10 or you turn them into actual cash so by doing an initial public offering all of a sudden all of the players will have liquidity which means that they can exchange what they have right including myself then they can exchange what they have for actual cash if they need to so how does that work so I would go to an investment bank although they've all turned into commercial banks now but we're talking in a pre-2008 world I would go to an investment bank and I'd say or more likely they would come to me and say hey you guys could raise big money in the public markets right now why don't you do an IPO and in a few seconds you'll realize why they are so keen to do it and I say sure we can raise a lot of money and it'll also you know will it'll will be in the press so that'll be free marketing in and of itself so say sure do all of the work so what they'll do is they'll be a lead underwriter let me write that down lead underwriter and that's essentially the person who does all of the the legal work they're going to write they're going to file documents with the SEC that describe the company and it's printed they're going to make models and projections all that and then they're also going to have kind of people riding along with them other banks and they're going to form a syndicate a syndicate is just a group of banks that work together to kind of handle a larger transaction than any one of them would be willing to handle by themselves and it kind of spreads the risk amongst them so that the bottom line is what the banks do other than doing all the legal work they'll value the company and then they'll go to all of their clients so all of the people who trade through that bank all of the institutional clients all of the hedge funds that have their prime brokerage accounts at those banks and just so you know a prime brokerage account is just like a brokerage account but it's a brokerage account for big guys it's a brokerage account for you know people managing 100 million dollars and not you know their etrade account that's all the prime brokerage is and they'll go to these guys and say hey we have this hot you know this hot IPO issue Sox calm and we've done our models and we think this is a five billion dollar market and we think that this company is worth we think this company is worth at least a hundred million dollars in its current form so once again realize I mean even though we're kind of doing something a little different now all of the other things were essentially you could call them private offerings or private placements in some way we were dealing essentially these were private equity sales and I know that word is used a lot private equity and that's what venture capital essentially is although normally when people talk about private equity they're not talking about venture capital now I'll do a whole other video on that but venture capital fundamentally is private equity right because these shares that you're selling they're not traded on a public exchange like the New York Stock Exchange or the Nasdaq or something like that so anyway back to what we were doing these guys these banks they go to their clients and say hey I have this hot new issue we are and and they'll kind of gauge sentiment they'll talk to clients they'll talk to each other and they'd say oh you know what the demand is and they'll essentially come up with some price which is essentially as high a price as they wanted to a high price because obviously as a company I want to sell the stock for as much as possible but they don't want to do it so high that the stock doesn't trade up most banks you want your IPO to look like this if this is the first day of trading and this is where this is your IPO price they want it to look like that so that in the future right in the future when there's an IPO people get excited to get in it if this IPO if the stock just did this if it started collapsing one it'll new people will lose interest in IPOs in general and then people will get suspicious about this company and I'll do a whole video on that so why do the mechanics work well they'll say hey you want to raise you want to raise 50 million dollars well you can do a couple of ways we say hey you know we're willing to issue we're willing to issue another let me think of the best way to X pay we're willing to issue another 10 million shares right and I'm not drawing it proportionally let's say we're willing to issue another 10 million shares and this should be a lot higher because this was 4 million right here we're willing to issue another 10 million shares how much money can we get for it and let's see these bankers talking to essentially the market and talking to each other they say hey we think we can justify these guys and we're going to do it for a little bit lower than they're actually worth but we think the market will by the fact that these guys are worth I don't know let's say they're worth I'll say 40 million oh let me make up at 80 million dollars in their current incarnation right which is essentially says before we raise the money we have 80 million dollars we have 4 million shares so they're saying $20 a share $20 a share so if we go in the issue another 10 million shares at $20 a share well actually issue will actually raise 200 million dollars actually for the sake of so I don't have to edit my math let's say that's how much we wanted to raise 200 million dollars so essentially what these guys will do our board of directors will issue these new shares and then these the syndicate of banks led by the lead underwriter will then sell it to their brokerage clients to you know mainly institutional investors but it might be some favored rich guys if it's not that favorite of an IPO maybe maybe you might get a call as well and they'll sell it to all of them and you say well why are they doing that why are they being you know why are they doing all of this work for the company helping them raise 200 million dollars and you know they're going to the pain of the legal work and you're they had to put a team of maybe 10 guys on this and they have to make models and it probably took them you know maybe 2 or 3 months to do it that's a lot of work what are they going to exchange for all of this well they actually get a commission and that Commission at least historically has been 7 percent of the offering 7 percent of the offering and now you get a sense of why it in a good market when you can do these things why it has in history paid to be an investment banker because 7% of 200 million dollars and frankly it's not a lot more work to do a 200 million dollar offering that it is to do a 20 million dollar offering it's probably about the same amount but 7% of 200 million is 14 million dollars so actually these guys aren't going to see 200 million they're going to see 200 - 14 million so they're going to see 186 million dollars and then these bankers are going to split 14 million dollars for and that that probably is about two months of work for maybe ten ten guys so you can imagine and and of course you know they have the whole bank that has to support they have all these you know not anyone could do this you have to have what you know what they call you know retail distribution you have to have now kind of a channel that you can you can plug these shares into to actually get rid of the 10 million shares you see it's a fairly profitable business so that's what an initial public offering is is it for the first time a company is selling shares to the public that is not just to these private investors and usually on an initial public offering although it's not always the case these guys aren't selling their shares as much as they would like to they're usually locked in for a certain period just because it looks bad if if especially the insiders right those were the founders of the company or actually sell their shares and maybe but six months later then I can go and sell my shares maybe if I do it on a small amount I could go and sell it on the Nasdaq and I have a publicly traded price on any given day I know exactly what my shares are worth and this is an important thing to realize because a lot of times when people buy a stock they're like oh I've invested in that company well kind of when you normally buy a stock on an exchange as you know New York Stock Exchange you're just buying the stock from somebody else you're not buying the stock from that company so when you pay $100 for an IBM stock I've run out of space that's why I'm just talking and not drawing let me erase this I've run out of time too but I think it's an important point when you buy stock from someone else so if I give my hundred dollars and I get a stock certificate of IBM most of the times if I were to do this today I'm just you know this is me with a moustache I'm just getting it from some other dude right well maybe he's happy because he got a hundred dollars right got a top hat that's what this is and this is what happens in the stock market every day so when I buy that I'm not really investing in IBM I'm just buying the money I'm just buying that share from another guy we're just exchanging shares in an IPO if I'm one of the IPO investors this is me my hundred dollars in this situation let's say we're dealing with Sox comm so Sox maybe that's its ticker symbol sock this time it's actually going to the company it's actually going to the or the website in this case of course of course 7% is being redirected to the investment bankers so when you're buying from an IPO you really are to some degree making an investment just like if you were doing in venture capital you really are making an investment in the company your money will then be used by the company to hire people and build factories and make out a website and do marketing in this case you're essentially just trading shares on a secondary in a secondary market secondary market just means it's not going it's not going to the actual company it's just going to another shareholder who bought it before you anyway I've really gone over my time limit so I'll see you in the next video