Question

Your new venture is no longer new, hut growing and rather rapidly. You are the CEO and currently own 55% of the outstanding shares. What is your preferred way to raise funding to support your rapid growth and why? What is the potential reward for your decision? What is the downside? Please provide an example of a company that has gone public in the recent past 2-4 years. Did it benefit or hurt them?

Answer 1

The venture is growing rather rapidly and the CEO owns 55% of the outstanding shares which essentially means that he holds majority of the shares in the company.

My preferred way to raise funding in order to support rapid growth would be selling some of the outstanding shares. As the business is growing rapidly, it also implies that the share price has increased which means one would get enough liquidity by selling some amount of shares in the market. Thus even if the CEO sells 1% of the shares which he owns, he will be able to raise enough capital without any increase in the debt burden.

Potential reward for the decision is that the company is essentially getting debt free cash as its debt ratios will be the same, its revenue will not be spent on making interest payments if it had sought credit. Thus there are several advantages as the money will be spent in aid of rapid growth which will drive up the revenues and the share price higher.

Downside is that the number of shares owned by the CEO would reduce, this would reduce his/hers decision rights as the other share owners would also have a say of what future steps the firm takes. Thus depending on how many shares the CEO sells, the decision making power will be impacted, if he doesn't in the end own the most shares in the company.

Uber which is the ride sharing app is the recent company which went public in May 2019. As its losses were mounting and its share price was way higher than what investors were willing to pay. The public offering was a fail. It did hurt the company in face of low valuation and low share price, which prevented investors from buying the stock.