Fm-9 Report (Explanation)

Ownership Dilution

A dilution of ownership is a process that involves the decrease of the fractional ownership that is enjoyed by shareholders of a given company. This reduction in the value of each individual share takes place when the company chooses to issue additional shares for purchase. Adilution of ownership can also take place due to the conversion of one security into another form, such as the conversion of preferred stock to common stock.

The decision to initiate a dilution of ownership is not something that a company does without careful consideration. Usually, the investigation into the possibility of issuing additional shares begins well before any action is taken. If the idea is determined to be in the best interests of the future operations of the company, an escalation process is normally implemented. The structure of the implementation must be in compliance with the bylaws and other founding documents of the company. This means that if any amendments must be made to those documents, they must be approved and registered before the dilution of ownership and the accompanying issuance of additional shares of stock takes place.

Other Rule-of-Thumb Valuation

Several other valuation methods are also employed to estimate the value of a company such as;1) Multiple Earnings, 2)Free Cash Flow, 3) EBIT (Earnings Before Interest  Trade), and many more..

1)     Multiple Earnings-The most common measure of how expensive a stock is. The earnings multiple is equal to a stock's market capitalization divided by its after-tax earnings over a 12-month period, usually the trailing period but occasionally the current or forward period. The value is the same whether the calculation is done for the whole company or on a per-share basis. The higher the earnings multiple, the more the market is willing to pay for each dollar of annual earnings. The last year's earnings multiple would be actual, while current year and forward year earnings multiple would be estimates, but in each case, the "P" in the equation is the current price. Companies that are not currently profitable (that is, ones which have negative earnings) don't have a earnings multiple at all. also called price/earnings ratio (P/E ratio).
 Take for example a buyer might pay 3 or 4 times earnings if a business has market leadership and a strong management.

2)     Free Cash Flow - is a measure of how much cash a business generates after accounting for capital expenditures such as buildings or equipment. This cash can be used for expansion, dividends, reducing debt, or other purposes. 

3)     EBIT(Earnings Before Interest & Taxes) –

Tar Pits Facing Entrepreneurs

            There are several inherent conflict between entrepreneurs ( users of the capital) and investors (supplier of the capital).

Staged Capital Commitment

            Venture Capitalist  have dealt with these long odds by developing a number of practices that afford them flexibility value. Perhaps most Important, they infuse capital into the new venture in several stages instead of committing it all up-front. Each new stage is generally linked to some significant development in the history of the venture: completion of design, pilot production and break -even are example. While the amounts disbursed are dictated by business requirements , they tend to increase substantially from one stage to the next if the venture capitalist continues to supply capital.

            Staged capital Commitment is valuable to venture capitalists for exactly the same reason that the ability to observe the outcome of the first toss of the biased coin before calling the second one was valuable in the coin-tossing example. staged Commitment lets the venture capitalist decide whether to put more into or pull out of the venture after learning more about whether it is a plum or a lemon.