FastLearner
Fury Holdings
Brutally Clever Empire
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Posted - 2008.01.09 20:50:00 -
[1]
 Originally by: Hexxx
Now, if you've had a business which is very successful and has been running for a while and you wish to expand, consider an share based IPO. This will introduce you to a bit more rigor in terms of investor questioning and you'll be expected to do some reporting. This is the route you'll need to take if you're looking to raise very large sums of money. Generally share IPO's use profit sharing as a means of paying dividends. The dividend should be a percentage of your profit for the month, so calculating your profit is very important (and so is reporting your profit). A share based IPO can also be used to start a business, but the standards expected for this are quite high and many find this to be a tough route...it is not impossible however and many have done it. Share based IPO's also have the biggest pay-off in terms of reputation. If you can run a share based IPO and handle investors and do good reporting in a timely manner with decent dividends...you'll find that people's opinion of you becomes quite high.
I hold an entirely opposite view to you on who should issue Bonds as opposed to shares.
People's initial offerings should be shares - offering to pay a share of ALL profits to investors, rather than the capped pay-out a Bond offers.
Established companies wishing to raise more ISK are the only ones that should be offering Bonds. They have a track record and, presumably, assets and an established operation giving them the credibility needed to offer a fixed-rate guaranteed repayment rate. These factors also mean that they lack the need to offer the higher rate of return that an IPO offers (or should offer) compares to a Bond.
I see there being three forms of financing available, not two:
1. Bonds. These offer a fixed rate of return and MAY have limited life-span. Because the rate of return is fixed (capped) this SHOULD be balanced by a much lower level of risk. These should only be used by established companies - or by new startups who are able to secure the capital raised against assets lodged with a third-party.
2. Loans. There are two sub-types of these. Either type can be obtained from a bank, from a single-investor or by issuing the debt to a wider market in a similar way to a Bond.
a) Secured loans. These are pretty much the same in practice as Bonds - there ARE differences but those differences are pretty minor.
b) Unsecured loans. On the face of it these may appear to be the same as Bonds - but the difference is pretty major. Whilst a loan may well promise the same returns as a Bond, the distinction is that a Bond is backed by existing assets/operations such as to actually be able to guarantee paying out the repayments and principal no matter what (that can be realistically expected to happen) occurs. On an unsecured loan there is always the risk of being unable to meet the agreed repayment terms - and the rate charged should be refelecting the reality of the existence of that risk.
3. A traditional IPO. This can offer the greatest return for investors - and, accordingly, represents the least-favourable option for most people wishing to raise capital. Not only does it offer to pay uncapped profit-sharing, it also requires a far more rigorous level of reporting than the other options. It does, however, offer in return the best way of establishing some credibility and reputation: as your operations are (or should be) far more transparent to the public than in a Bond/loan.
AS already stated - I think your recommendations are entirely the wrong way round. You recommend doing a Bond first - at a point where the individual has no established credibility. Starting with an IPO would offer them a much better way to gain credibility - and, by offering uncapped profit potential to investors, provides them with much more incentive to invest.
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