XV' Partnerships, Private Placements,

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XV. Partnerships, Private Placements, Venture
Capital
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A. PARTNERSHIPS

• Types of Partnerships
• General Partnership an agreement between
  individuals to share in running a business,
  sharing gains and losses
• Personal Liability each partner has unlimited
  liability for partnership debts, could lose more
  than his or her investment
• Unless specified otherwise, all gains and losses
  are shared equally among the partners
• The partnership agreement provides the legal
  framework for operations, including division of
  profits and losses
• Investment Club a partnership formed to invest
  pooled funds generally divides profit and loss
  by initial investment

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A. PARTNERSHIPS

• Limited Partnerships a form of ownership in
  which investment control is assumed by a general
  partner, while the other partners have limited
  control
• General Partner organizes the partnership,
  writes the partnership agreement, assumes any
  partnership liabilities in excess of the limited
  partners investment, and obtains a majority of
  partnership profits in return
• Limited Partner passive investors, provide
  money only, can lose no more than the money
  invested, receive a share of the partnerships
  profits

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A. PARTNERSHIPS

• Partnership Agreement the legal document
  specifying partners rights and division of gains
  and losses
• Prospectus for limited partnership investments,
  includes the partnership agreement and details
  fees and the division of profits between limited
  and general partners
• Limitations on Partnership Investment for a
  general partnership, there are no restrictions,
  however, limited partnerships generally require
  limited partners to be accredited investor

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B. PRIVATE PLACEMENTS

• Can be used for either private (not publicly
  traded) stock offerings or other ownership shares
  of a business
• For a formal private placement, the investor must
  be an accredited investor
• Private placement memorandum similar to a
  prospectus, details the risks of an offering,
  business officers, actual and pro forma financial
  standards, and related material
• Subscription agreement a contract between the
  business and the investors requiring the investor
  to provide the agreed upon capital

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B. PRIVATE PLACEMENTS

• Private Placement Defined
• A private placement is an agreement for equity
  investment in a business made directly between
  the business and the investor
• Offered to a limited number of investors
• Illiquid ownership interests can not be
  publicly sold or purchased generally, the
  private placement agreement specifies who the
  investor will be, and the ownership interest is
  not transferable
• No regulation because private placements are a
  direct contract between a business and an
  investor, they are not regulated

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C. VENTURE CAPITAL

• Generally regarded as seed money, used to help
  start or expand a new business
• A business can receive venture capital as a start
  up, when expanding before profitability, or after
  the business becomes profitable (but before a
  buy-out or an initial public offering)
• The required rate of return or portion of equity
  required to receive venture capital funding is
  relatively high, the venture capitalist often
  provides advice and may take control of a
  corporation to protect its investment

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C. VENTURE CAPITAL

• Forms of Venture Capital investments
• Debt loan contract between the business and the
  venture capital firm, generally with above market
  interest rates
• Equity where the venture capital firm purchases
  an ownership share of the business, generally in
  the form of private placement stock
• Preferred Stock the favored type of venture
  capital investment, provides interest yields and
  seniority to capital in the event that the firm
  fails, but with an equity interest if the firm
  succeeds

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C. VENTURE CAPITAL

• Sources of Venture Capital Funding
• Partnerships business owned by individuals
  specifically to provide venture capital for other
  businesses
• Limited Liability Corporations a cross between
  a partnership and a corporation, does not have
  the restrictions on making investments that
  publicly traded corporations must adhere to
• Investment Management Firms pools of money from
  accredited investors, with an investment manager
  making decisions concerning which venture capital
  projects to fund

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C. VENTURE CAPITAL

• Advantages and Disadvantages of Venture Capital
• Advantages
• Venture capitalists generally have expertise in
  guiding new firms, can help with management
• Venture capitalists can provide substantial funds
  for business development
• A venture capital firms investment in a business
  can give the business a stamp of legitimacy
• Disadvantages
• The venture capital firm often requires some
  control over the business operations
• Venture capital money is expensive the venture
  capitalists expect to obtain investment returns
  commensurate with their risk of loss of capital