A Return to the Story of Best Blogs Ever, Inc. (2)

WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK.  FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON

We will continue the story of BBE with the next two previously posted chapters.  Here is a  portion of the third blog, which was called Middle Years - Success Brings Problems:

"After some discussion, it is decided that the company should issue more stock to raise the necessary capital.  Some of the stock might be bought by the existing shareholders, but to raise the entire $70,000, new investors must be found.  We might be able to find some more individuals to invest in BBE, but securities laws would make such a stock offering complicated.  One of the shareholders suggests that BBE contact a venture capital firm to see if there would be any interest in an investment.  A venture capital firm is considered a sophisticated investor, which would make it easier and cheaper to meet the requirements for a stock sale under state and federal securities laws.

Both the venture capitalists and the private equity operators have the same ultimate goal, which is to sell the company to another group of investors at a profit after a few years or to take the company public.   That means the company's stock is sold to investors in an initial public offering or IPO on a stock exchange.  Because everyone is satisfied with the way the directors and officers of BBE are running the company, the decision is made that new management from private equity is neither needed nor wanted.  Therefore, BBE will approach a venture capital firm."

Here is a link to the entire blog, which was posted on February 14, 2011.

Here is a  portion of the fourth blog, which was called Preparing for the Venture Capitalists:

"For purposes of our story, the following financial numbers will apply:  annual earnings of $5,000 for the last 12 months of operations; retained earnings of $10,000 ($20 per share); most recent annual dividends of $1,500 paid on the 500 outstanding shares ($3 per share).  At the end of our last post, everyone had decided that BBE would issue more shares of stock to raise the $70,000 for new servers, additional employees and an expansion of office space to house the company's operations.  Since the existing shareholders do not have that kind of money to invest in the company, the decision was reached to approach a venture capital firm ('VC') for an investment in BBE.

Assuming the par value remains the same, BBE would have to issue 7,000 new shares of common stock to raise the $70,000.  BBE still has 500 authorized but unissued shares it could sell.  The Articles of Incorporation would have to be amended to authorize an additional 6,500 common shares in order to have enough shares to sell.  If the venture capital firm bought that many shares of BBE common stock, the original shareholders will no longer have control of the company.  The VCs could outvote them on all corporate issues.  Continued control of the company is very important to us.  We do not mind sharing profits with the VCs, but we do not want to lose the right to control the management of BBE.

In this sort of situation, many corporations issue a different form of stock, one which does not have voting rights, but does have some rights not enjoyed by the voting common stock.  The nonvoting shares could have a preference over the voting shares in one way or another; in effect a trade off of one right for another.  Such a form of stock is called preferred stock."

Here is a link to the entire blog, which was posted on February 21, 2011.

We will look at the next two chapters of BBE's story in the next blog.

Comments are always welcome.