Methods of Venture capital financing
Equity Capital
·
All Venture
Capital Firms (VCF) provide equity.
·
Their
contribution may not exceed 49% of the total equity capital.
·
The effective
control and majority ownership of the firm may remain with the entrepreneur.
·
The Venture
capitalist becomes entitled to a share in the firm’s
·
Profits as
much, he is liable for the losses.
·
The advantage
to the VCF is that it can share in the high value of the venture and make
capital gains if the venture succeeds.
Participating
debentures
Non-convertible
debentures
·
These carry a fixed rate of interest.
Redeemable at par/premium.
·
Secured and can be cumulative or
non-cumulative.
Partly
convertible debentures
·
A convertible portion
·
Converted into equity shares at
par/premium.
·
A non-convertible portion
·
Earns interest till redemption.
Coupon
bonds/debentures
·
These can be either convertible or
non-convertible with zero/no interest rate.
Secured
premium notes
·
These are secured, redeemable at premium
in lump sum /installments, have zero interest and carry a warrant against which
equity shares can be acquired.
Conditional
loan
·
This is a form
of loan finance without any pre-determined repayment schedule or interest rate.
·
A conditional
loan is repayable in the form of a royalty after the venture is able to generate
sales. No interest is paid on such loans.
·
Some VCFs give
a choice to the enterprise of paying a high rate of interest (above 20%)
instead of royalty on sales once it becomes commercially sound.
·
Some funds
recover only half of the loan if the venture fails.
·
Conventional loans carry lower interest
initially which increases after commercial production commence.
·
A small royalty is additionally charged
to cover the interest foregone during the initial years.
·
The repayment of the principal is based
on a pre-stipulated schedule, Venture Capital Institutions usually do not
insist upon mortgage/other security.
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