Chapter 10, Problem 1RQ

Corporations typically do not first raise capital by Issuing stock to the general public. What are the common stages of equity financing leading to an initial public offering (IPO)?

To determine

To identify: The common stages of equity financing leading to an initial public offering.

Explanation of Solution

Initial public offering (IPO):

Rising of a corporations’ capital through offering fresh stock to the general public for the first time is known as initial public offering.

Equity financing:

Equity financing is a wide range of activity to raise finance by selling the shares of the company.

The following are the common stages of equity financing leading to an initial public offering:

• As a first step, companies sells its stock to the founder of the business,
• Second step, companies sells its stock to the family and friends of the founder of the business,
• Third step, companies raise capital through selling its stocks to angel investors and venture capital firms.

1. 1. ✓ Angel investors: Angel investors are wealthy individual investors who usually willing to invest in a risky but promising business venture.
   2. ✓ Venture capital firms: Venture capital firms meant for providing additional financing in millions, but they hold some percentage of ownership in the investee company.

• If the company’s equity financing needs more than $20,000,000, then as a last step they will go for issuing stocks to the public through IPO.