🙋 Student Questions and Answers
Click here to learn about timestamps and my process for answering questions. Section agendas can be found here. Email office hour questions to robmgmte2700@gmail.com. PS1Q2=“Question 2 of Problem Set 1”
📅 Questions covered Saturday, March 30
Slide 13
❔ What happens with the shares? Why do we not subtract off the shares we sold?
✔ Covered during video. The shares sold to the Angel Investor were newly created shares. They weren’t shares held by the founder. In other words, the sale to the angel was a primary market transaction between the firm and the angel. It wasn’t a secondary market transaction between the founder and the angel. See also the following question.
You can add content as they are watching.
Primary vs Secondary
❔ Can you remind us of the difference between primary and secondary market transactions?
In a primary market transaction, the corporation creates new shares and sells those shares to an investor. The corporation receives more cash on its balance sheet and the investor gets the shares.
In a secondary market transaction, a previous investor sells their shares to a new investor.
Both primary and secondary market transactions can be part of IPOs. For example, suppose that Sequoia capital has 100M shares in Luxardr co. During Luxardr’s IPO, Sequioa capital sells it’s 100M shares and Luxardr issues 900M new shares that Luxardr sells to investors. In this situation, the underwriters would have 1,000M shares to sell. The sale of Sequioa’s shares would be a secondary market transaction, whereas the sale of the newly issued shares by Luxardr would be a primary market transaction.
Angels and VCs may want to sell their shares so they can cash out and find other startups to invest in. The founder may want to sell their shares because they are tired of being poor. 🤣 Now they can buy a mansion. (When you get to the IPO stage, you’ve made it.)
Why do we use the most recent price to calculate valuations?
❔Could you please explain why we are using the VC investment to calculate our post money valuation share price? Why not use the angel investment to determine a share price? If the VC investment was not in the picture and another angel investor comes in to invest, would we use this new angel’s investment to calculate our post money valuation share price?
✔ You always use the most recent investment number because you assume that the most recent number is the most accurate, and you want to get the most accurate valuation possible for the firm.
The fortunes of a early-stage firm are going up and down based on their ability to develop and sell their products. (Did the prototype work? Did the patent go through? Are new discoveries being made? Is another competitor coming into the market, selling the same product?) Using the most precent price ensures that you have the most accurate valuation.
📅 Questions covered Monday, April 1
Slide 87
🕣 7:46
❔ Slide 87. Where did the extra $.40 come from?
Can we Review the problem on slide 87/88?
✔ We did the full example.
Using algebra with percent-ownership
🕣 8:45
❔I know that I need to solve for a certain percent of the total amount of shares and every time I try to set up an equation, I think I’m overthinking the equation setup to know what I’m even solving for. Are you able to help with the problem setup?
✔ Let’s do some examples:
✏️ Easy: Suppose your ownership share is currently 15% of WatsonCo. WatsonCo has 22M shares outstanding. How many shares do you own?
✔ First, we’ll do this with a formula: Plug and chug: help
- Equation → %Ownership = #SharesYouOwn/Total#Shares
- Plug 🔌 → 15% = #SharesYouOwn/22M
- Solve 🚂 → #SharesYouOwn = 15% * 22M = 3.3M
- 🧠 → You own 3.3M shares.
Intuitively, you must own 15% of the shares. 15% of 22M shares is 3.3M.
✏️ Harder: Suppose you want to purchase 15% of WatsonCo. You will be giving them $12M. There are currently 22M shares outstanding.
✔ This is much harder to to do without a formula. Plug and chug: help
- Equation → %Ownership = #SharesYouWillOwn/Total#Shares Because we are calculating your percent ownership after you are given the new shares, the total number of new shares will be different. 🙋Would we need to add the new shares to the existing 22m
- Plug 🔌 → 15% = #SharesYouWillOwn/(22M+ #SharesYouWillOwn)
- Solve 🚂 → 15% = x/(22M+ x)
- 15%(22M+x)= x
- 15%*22M +15%*x = 100%*x (subtract 15%*x from both sides)
- 3.3M = 85%x
- x = 3.3M/.85 = 3.88M
- 🧠 → You will need to receive 3.88M newly created shares in order to own 15% of the company. This number is larger than the number in the previous, easier example because there are more shares due to the 3.88M newly created shares.
- On tough algebra questions like this, I suggest checking your work by recalculating the % ownership you will end up with:
- %Ownership = #SharesYouOwn/Total#Shares = 3.88/(22+3.88)= 14.99% ≈ 15%
Because the newly created shares show up twice in the equation, I’d suggest doing this with algebra.
Percent ownership is always only determined by the numbers of shares, using the above formula: %Ownership = #SharesYouOwn/Total#Shares.
✏️ In the above example, what price did you pay per share?
✔ You received 3.88M shares and paid $12M, so you paid 12/3.88=$3.09 per share.
✏️ What is the post-money valuation of the firm?
✔ There are currently 22+3.88 =25.88M shares outstanding. In the last round of financing, the shares were sold for $3.09 per share, so the post-money valuation is 25.88*3.09=$79.96M
Auction IPOs
🕣 9:04
❔In general, I want to be sure I understand the auction IPO table. If the goal is for the firm to issue the most amount of shares at the highest price, is it accurate to say that you could start at the most expensive share price and work your way down the chart until you’ve added up the shares at each price to equal the total shares they are issuing, and once you reach that point, that price point is the price you will issue the shares at, correct?
✔ That sounds correct. You keep working down the chart until the added up shares are at least as large as the number of shares that you need to sell. The corresponding price per share will allow you to sell up to that many shares (ie the sum that you calculated). We did examples here on Saturday.
🕣 9:06
❔When given the number of shares issued, is it as simple as starting from the “lowest” price per share, multiplying by the number of shares demanded at that price, and keep moving up until you eventually “run out of shares” and then add up all the values from each level of the share price demanded?
✔ I’m not sure why are are mulptiplying at each step. The previous question has a better description of the process. We did examples here on Saturday. Generally, you follow the steps from the previous question until you’ve found the row that you can sell enough shares on. You write down the price and that is when you multiply (ie after you’ve found the proper row). You multiply the share price you found (ie the share price that will allow you to sell all the shares you want to sell) times the number of shares you want to sell.
Q4 Interpretation
🕣 9:11
PSQ#4 : Would the additional shares being issued part of the same IPO or an additional SEO?
✔ It will be part of the IPO, not an additional SEO. They changed their mind.
Slide 64 (Auctions)
Would it be possible to explain Slide 64 when it states that “Shares are awarded on a pro rata basis to bidders who bid exactly the winning price”?
Q5a interpretation
🕣9:12
❔ Rob, could you go over the wording on question 5a in PS6?
✔ Underpricing refers to the difference between the price you charged and the price you could have charged. You convert it to a percentage by comparing it to the price you actually charged in the IPO. You don’t compare the underpricing to the price you could have charged.
”Offering price” = the price you actually charged = “the IPO price”
Did Alibaba have two IPOs?
Yes. It listed first on the NYSE and then later on the Hong Kong Stock Exchange.