Page 452 - Business Principles and Management

Chapter 16 • Financing a Business

selling through an investment banker. If stockholders do not wish to take advan-
tage of their stock rights, they can sell their options to others within a stated
period at a small gain. Employers sometimes offer employees stock options as
part of an employee stock ownership plan (ESOP).

VENTURE CAPITAL
Venture capital is financing obtained from an investor or investment group that
lends large sums of money to promising new or expanding small companies.
Venture capitalists often ask for a percentage of ownership rights in the company in
return for the investment. These investors expect some of the businesses to fail,
but they accept the risks in the expectation that others will be successful enough
to more than offset losses. They demand a carefully developed business plan that
shows a high potential for success. Venture capitalists, many of whom are former
entrepreneurs, have helped many small firms become large successful firms.

CHECKPOINT
What do venture capitalists require of businesses before they
provide financing?

16.3 Assessment

UNDERSTAND MANAGEMENT CONCEPTS
Determine the best answer for each of the following questions.
1. A short-term form of finance obtained by buying goods and services
that do not require immediate payment is
a. a line of credit
b. trade credit
c. a term loan
d. a promissory note
2. An organization that helps a business raise large amounts of capital
through the issue of bonds or stocks is a(n)
a. commercial bank
b. stock exchange
c. venture capital firm
d. investment bank

THINK CRITICALLY
Answer the following questions as completely as possible.
3. Why would a business choose to use a line of credit rather than
obtain a loan and receive all of the money at that time?
4. If you were an entrepreneur with a successful new business, would
you prefer to obtain financing for expansion from a venture capital
firm or from selling stock through an IPO?
Explain your choice.

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