Question

Suppose there is a startup Alpha founded last year in a very promising industry with a lot of growth opportunities (1) This year Alpha considers raising more funds for expanding its business and innovations, it could either choose to raise funds by issuing equities to some venture capitals or choose to issue some debts. Which way do you think is a better choice? Why? (2) Suppose this year Alpha also earns considerable profit, what are the two ways to deal with the profit? Which way is better in this case, and why? Essay Toolbar navigation BI S K2 를 들 든 E iii A А

Answer 1

1. Debt capital will generally be having debt covenants and debt covenants will mean that they will be restricting business in taking high risk projects and these startup companies are trying to innovate itself and expand itself into high risk projects so they should be trying to avoid debt capital and instead look for issuance of equity share to venture capitalist because venture capitalist will be providing with the flexibility to explore the business and expand it in the long run and it should be trying to take the advantage and go for using the venture capitalist route by issuance of equity shares so that it can explore itself because debt capital will also we having a fixed payment and the company can have a lot of insolvency risk since it is just a startup firm.

2. If this year Alpha has considerable profit, then it can either distribute the profit to shareholders or it can invest those profits back into the business so distribution of profit is one choice, if the company is not able to make excessive rate of return and reinvestment of those profits back into the business is another choice is the company's asset of making higher rate of return from reinvestment.