Assume that you started up a firm 2 years ago, it has been operating very well in the past 2 years. You are considering expanding your business by issuing equity securities. However, since your firm’s value is less than $50 million, you are not able to go public now and you are only able to obtain funds via private equity.

a. Where can you obtain funds from? Briefly explain the process.

Assume that after five years, your firm plans to (and is qualified for) go public via IPO.

b. Before IPO, a prospectus and roadshow is required. What is a prospectus? Why does a firm do a road show before its IPO? What are the factors that may affect the offer price of the stock at the time of the IPO?

c. Assume that you hope you can sell the share at an offer price of $12. However, the securities firm you hired to facilitate your IPO suggests that the offer price for the stock be $10 per share to ensure that all shares can be sold. What is the advantage of following the securities firms’ suggestion? What is the disadvantage? Do you think that the securities firm’s incentive to place the shares comply with that of your firm?

d. Your lead underwriter (the securities firm) your firm hired requires a lockup provision. What is a lock provision? Explain why it is required by your lead underwriter.

e. Explain why would the stock price be important to your firm even after the IPO?