🧠 Example: Financing a Startup

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Finance just means “find a way to pay for.” For example, “financing a car or a house” means finding a way to pay for a car or a house.

Much of finance revolves around corporate securities (stocks and bonds), so let’s consider a corporate finance example.

Suppose you have an idea for a new app, but it requires you to line up several partner brands and so launching it will require money. You estimate $1.1M, but you don’t need it all at once. You only have $300K to invest. You need to find a way to finance the business.

Entrepreneurship takes an iron gut. You incorporate, transfer the $300K to the firm in return for 20,000 shares of stock. You have issued only 20,000 shares total, so you own 100% of the company.

Assets	Liabilities
$300K Cash	No Debt
	$300K of Shareholder Equity

You work, building your app until you have a basic demo. You consider turning to Friends and Family for additional investments, but decide against this common practice for your business. Instead, a wealthy individual invests $600K in return for 10,000 more shares. This type of investor is known as an Angel Investor because they specialize in providing relatively small amounts of financing to very young businesses. They are willing to pay more money per share because the company is in a more mature state. Watch Shark Tank on CNBC for a reality TV take on angel investors.

Now there are 30,000 shares total, and you own 2/3 while they own 1/3. Angels often ask for preferred equity . It’s just equity with a target dividend that it pays out every quarter.

You continue working and are ready to launch. You need the remaining 300K to fund the launch, so you take out a bank loan .

Assets	Liabilities
$100K Cash	$300k of Bank Debt
	Shareholder Equity
	?

You launch your product and now the company has revenue! Just barely enough to cover your expenses, so you have a bit of profit.

You continue grinding out your product, organically growing your business. It’s a great product, so you grow relatively rapidly and your profits grow rapidly, also. You hire more developers and marketers using profits - retained earnings .

At this point, your company looks like a money machine. It will produce profits indefinitely. How much is this money machine worth? On some level it is worth whatever people will pay for it (this is called Market Cap). But how much should they pay for it?

Fundamentally, the usefulness of a corporation arises from its ability to make profits and then distribute those profits to its owners. The “fair price” for the corporation is based on the present value of the future profits that it can distribute to its owners.

There are two ways of distributing those profits:
1.) it can distribute the cash as dividends. For example, the firm could pay a dividend of $.50 per share to all owners. This means that you get a check for $.50 × $20,000 = $10,000.00 and the other investor gets a check for $.50 × $10,000=$5,000.00.
2.) The firm can also repurchase its own shares, driving the market price of the shares up and allowing the owners to sell those shares for a higher price.

But what if you don’t know what the future cash flows will be? Another concept, called expected value, can help you analyze this. The concepts of present value and expected value can help you analyze a fair price of any investment when used in conjunction with other tools. We will cover both expected and present value in great depth later in the course.

VCs are even worse. (but important for our system!)

Bonds

Want the same presentation from a billionaire investor? William Ackman: Everything You Need to Know About Finance and Investing in Under an Hour Big Think - https://www.youtube.com/watch?v=WEDIj9JBTC8