Entrepreneurial Finance and Accounting for High-Tech Companies

by Fabozzi

ISBN: 9780262336895 | Copyright 2016

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This book offers an accessible guide to the financial aspects of launching and operating a high-tech business in such areas as engineering, computing, and science. It explains a range of subjects—from risk analysis to stock incentive programs for founders and key employees—for students and aspiring entrepreneurs who have no prior training in finance or accounting. 

The book begins with the rigorous analysis any prospective entrepreneur should undertake before launching a business, covering risks associated with a new venture, the reasons startup companies fail, and the stages of financing. It goes on to discuss business models and their components, business plans, and exit planning; forms of business organization, and factors to consider in choosing one; equity allocation to founders and employees; applicable U.S. securities law; and sources of equity capital. The book describes principles of financial accounting, the four basic financial statements, and financial ratios useful in assessing management performance. It also explains financial planning and the use of budgets; profit planning; stock options and other option-type awards; methodologies for valuing a private company; economic assessment of a potential investment project; and the real options approach to risk and managerial flexibility. Appendixes offer case studies of Uber and of the valuation of Tentex.

“Entrepreneurial Finance and Accounting for High-Tech Companies by Frank J. Fabozzi is an outstanding textbook for business school students who wish to start their own companies. This book will definitely become required reading for any serious Entrepreneurial Finance course! I can't wait to use it!”

—Jim Kyung-Soo Liew, Assistant Professor in Finance, Johns Hopkins Carey Business School


“Frank Fabozzi’s new book Entrepreneurial Finance and Accounting for High-Tech Companies reflects his decades-long experiences as an entrepreneur as well as an educator and researcher. The book is comprehensive: in addition to treating entrepreneurial finance from the perspective of the founders rather than from the perspective of a venture capitalist, it also considers financial accounting, legal, and critical tax issues. It is also broad in its range, covering such topics as: negotiating deal terms, valuation methodologies, exit strategies, and profit planning. This book will soon become required reading for practitioners, professors—for teaching and research—and students.”

—Frank Jones, Professor, Accounting and Finance Department, San Jose State University


“Fabozzi has written a comprehensive book that will serve both as a seminal guide for professionals and as an effective centerpiece for entrepreneurial finance and accounting courses at all levels. I highly recommend it to both constituencies.”

—David Brophy, Director of the Office for the Study of Private Equity Finance, Ross School of Business, University of Michigan

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Contents (pg. v)
Foreword (pg. xvii)
Preface (pg. xix)
OVERVIEW OF THE BOOK (pg. xxi)
ACKNOWLEDGMENTS (pg. xxiv)
ABOUT THE AUTHOR (pg. xxv)
1 INTRODUCTION (pg. 1)
THE RISKS ASSOCIATED WITH A NEW VENTURE (pg. 1)
WHY NEW VENTURES FAIL (pg. 6)
STAGES OF A VENTURE (pg. 9)
KEY POINTS COVERED IN THIS CHAPTER (pg. 12)
FURTHER READINGS (pg. 13)
2 THE BUSINESS MODEL, BUSINESS PLAN, AND EXIT PLANNING (pg. 15)
THE BUSINESS MODEL (pg. 15)
THE BUSINESS PLAN (pg. 25)
EXIT PLANNING (pg. 30)
KEY POINTS COVERED IN THIS CHAPTER (pg. 35)
FURTHER READINGS (pg. 37)
3 SELECTING A FORM OF BUSINESS ORGANIZATION (pg. 39)
FORMS OF BUSINESS ORGANIZATION (pg. 39)
NON–INCOME TAX FACTORS TO CONSIDER IN SELECTING A FORM OF BUSINESS ORGANIZATION (pg. 42)
INCOME TAX CONSIDERATIONS (pg. 49)
SELECTING THE STATE IN WHICH TO INCORPORATE OR FORM AN LLC (pg. 51)
KEY POINTS COVERED IN THIS CHAPTER (pg. 53)
FURTHER READINGS (pg. 55)
4 FOUNDERS’ STOCK AND EMPLOYEE STOCK OPTIONS (pg. 57)
FOUNDERS’ STOCK (pg. 57)
VESTING SCHEDULE (pg. 61)
TAX TREATMENT OF EQUITY INCENTIVE PLANS (pg. 63)
EQUITY AWARD PLANS (pg. 64)
EQUITY COMPENSATION AWARDS FOR PARTNERSHIPS AND LIMITED LIABILITY COMPANIES (pg. 73)
KEY POINTS COVERED IN THIS CHAPTER (pg. 74)
FURTHER READINGS (pg. 78)
5 FUNDRAISING AND THE U.S. SECURITIES LAW (pg. 79)
WHAT IS A SECURITY? (pg. 79)
FEDERAL SECURITIES LAW (pg. 80)
RULES ON GENERAL SOLICITATION AND ADVERTISING (pg. 81)
REQUIRED FILINGS WITH THE SEC (pg. 87)
KEY POINTS COVERED IN THIS CHAPTER (pg. 93)
FURTHER READINGS (pg. 95)
6 SOURCES OF FINANCING (pg. 97)
PRELIQUIDATION STAGES OF FINANCING (pg. 97)
DUE DILIGENCE PROCESS (pg. 99)
SOURCES OF SEED STAGE FINANCING (pg. 100)
PRE-IPO EXPANSION FINANCING (pg. 111)
INITIAL PUBLIC OFFERING (pg. 118)
KEY POINTS COVERED IN THIS CHAPTER (pg. 123)
FURTHER READINGS (pg. 126)
7 FINANCING VIA EQUITY AND EQUITY DILUTIVE SECURITIES (pg. 127)
COMMON STOCK (pg. 127)
CONVERTIBLE PREFERRED STOCK (pg. 129)
CONVERTIBLE NOTE (pg. 133)
DEBT WITH WARRANTS (pg. 135)
TERM SHEETS (pg. 136)
PREAND POST-MONEY VALUATION (pg. 140)
KEY POINTS COVERED IN THIS CHAPTER (pg. 143)
FURTHER READINGS (pg. 145)
8 OBJECTIVES AND PRINCIPLES OF FINANCIAL ACCOUNTING (pg. 147)
THE FOUR FINANCIAL STATEMENTS (pg. 148)
GAAP FINANCIAL ACCOUNTING PRINCIPLES (pg. 150)
THE INDEPENDENT AUDITOR AND THE AUDITOR’S REPORT (pg. 161)
NON-GAAP ACCOUNTING FOR PRIVATE COMPANIES (pg. 162)
HOW TO SELECT AN ACCOUNTING FRAMEWORK (pg. 163)
KEY POINTS COVERED IN THIS CHAPTER (pg. 166)
FURTHER READINGS (pg. 168)
9 BALANCE SHEET (pg. 169)
ASSETS (pg. 169)
LIABILITIES (pg. 180)
STOCKHOLDERS’ EQUITY (pg. 185)
LIMITATIONS OF THE BALANCE SHEET (pg. 188)
KEY POINTS COVERED IN THIS CHAPTER (pg. 188)
FURTHER READINGS (pg. 191)
10 INCOME STATEMENT (pg. 193)
STRUCTURE AND COMPONENTS OF THE INCOME STATEMENT (pg. 193)
SALES/REVENUE (pg. 194)
OPERATING COSTS (pg. 198)
INCOME TAXES (pg. 203)
NET INCOME (pg. 204)
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS (pg. 206)
COMPREHENSIVE INCOME AND OTHER COMPREHENSIVE INCOME (pg. 206)
EARNINGS PER SHARE (pg. 209)
KEY POINTS COVERED IN THIS CHAPTER (pg. 210)
FURTHER READINGS (pg. 213)
11 STATEMENT OF CASH FLOWS AND STATEMENT OF STOCKHOLDERS’ EQUITY (pg. 215)
STATEMENT OF CASH FLOWS (pg. 215)
STATEMENT OF STOCKHOLDERS’ EQUITY (pg. 220)
KEY POINTS COVERED IN THIS CHAPTER (pg. 220)
FURTHER READINGS (pg. 222)
12 FINANCIAL RATIOS (pg. 223)
KEY FINANCIAL RATIOS (pg. 223)
PUTTING IT ALL TOGETHER: DETERMINANTS OF EARNINGS PER SHARE (pg. 233)
COMMON SIZE ANALYSIS (pg. 237)
KEY POINTS COVERED IN THIS CHAPTER (pg. 238)
FURTHER READINGS (pg. 239)
13 FINANCIAL PLANNING (pg. 241)
WHY FINANCIAL PLANNING IS IMPORTANT (pg. 242)
BUDGETS AND FORECASTED FINANCIAL STATEMENTS (pg. 242)
FORECASTING THE BALANCE SHEET AND INCOME STATEMENT (pg. 250)
ACQUISITIONS AS A STRATEGIC GROWTH PLAN (pg. 257)
KEY POINTS COVERED IN THIS CHAPTER (pg. 264)
FURTHER READINGS (pg. 267)
14 PROFIT PLANNING (pg. 269)
THE NATURE OF PRODUCTION COSTS (pg. 269)
BREAK-EVEN ANALYSIS (pg. 274)
COST-VOLUME-PROFIT ANALYSIS (pg. 276)
LIMITATIONS OF BREAK-EVEN AND COST-VOLUME-PROFIT ANALYSIS (pg. 279)
CASH FLOW VERSUS PROFIT (pg. 282)
KEY POINTS COVERED IN THIS CHAPTER (pg. 283)
FURTHER READINGS (pg. 286)
15 FINANCIAL OPTIONS (pg. 287)
BASIC FEATURES OF FINANCIAL OPTIONS (pg. 287)
RISK AND RETURN CHARACTERISTICS OF OPTIONS (pg. 288)
BASIC COMPONENTS OF THE OPTION PRICE (pg. 290)
FACTORS THAT INFLUENCE THE PRICE OF A FINANCIAL OPTION (pg. 292)
DETERMINING THE VALUE OF A FINANCIAL OPTION: PRICING MODELS (pg. 294)
BEYOND THE SIMPLE FINANCIAL OPTION (pg. 297)
KEY POINTS COVERED IN THIS CHAPTER (pg. 299)
FURTHER READINGS (pg. 300)
16 METHODS FOR VALUING PRIVATE COMPANIES (pg. 301)
VALUATION OF PRIVATE VERSUS PUBLIC COMPANIES (pg. 302)
THE STANDARD OF VALUE (pg. 302)
VALUATION METHODS (pg. 304)
ASSET-BASED METHOD (pg. 305)
INCOME METHOD (pg. 306)
MARKET METHOD (pg. 320)
OPTION-BASED METHOD (pg. 325)
VALUATION OF PRE-REVENUE AND POSITIVE EARNINGS STARTUP FIRMS (pg. 325)
DISCOUNT FOR LACK OF LIQUIDITY (pg. 331)
KEY POINTS COVERED IN THIS CHAPTER (pg. 333)
FURTHER READINGS (pg. 338)
17 VALUING CAPITAL PROJECTS (pg. 339)
CLASSIFYING INVESTMENT PROJECTS (pg. 339)
ESTIMATING CASH FLOWS OF CAPITAL PROJECTS (pg. 341)
CAPITAL PROJECT VALUATION METHODS (pg. 342)
OTHER CONSIDERATIONS IN CAPITAL PROJECT SELECTION (pg. 349)
KEY POINTS COVERED IN THIS CHAPTER (pg. 351)
FURTHER READINGS (pg. 355)
18 REAL OPTIONS ANALYSIS (pg. 357)
TECHNOLOGY AND REAL OPTIONS (pg. 358)
MOTIVATION FOR THE REAL OPTIONS APPROACH (pg. 361)
CLASSIFICATION OF REAL OPTIONS (pg. 366)
PRACTITIONER USE OF REAL OPTIONS ANALYSIS (pg. 367)
REAL OPTIONS VALUATION MODELS (pg. 368)
KEY POINTS COVERED IN THIS CHAPTER (pg. 372)
FURTHER READINGS (pg. 373)
Appendix A (pg. 375)
CASE: UBER (2014) (pg. 375)
Appendix B (pg. 383)
CASE: VALUATION OF TENTEX (pg. 383)
Index (pg. 407)

Frank Fabozzi

Frank J. Fabozzi is Professor of Finance at EDHEC Business School in France and has held positions at Yale School of Management, Princeton University, and MIT Sloan School of Management. He is the author of Capital Markets: Institutions, Instruments, and Risk Management (fifth edition, MIT Press) and other books.


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