Capital is one of the most important elements of enterprise development. Whether it is a start-up enterprise or a large-scale enterprise, the importance of capital to the development of an enterprise needs no elaboration. In order to solve the capital needs, enterprises can deposit their own funds through operation on the one hand, and obtain the funds needed for enterprise development through external financing on the other hand. Due to the tight cash flow or limited profitability of many enterprises, external financing has become an important fund channel for the development of many enterprises, especially early-stage enterprises and scientific and technological innovative enterprises. However, the external financing of enterprises involves many problems such as operation, law and finance, which is a highly professional matter, and a slight mistake will bring great risks to the enterprise operation. Due to the failure of the declining enterprises is not only the pony pentium, South Beauty, real kung fu and so on are lessons from the past. Still, many companies are following their old path. This paper will discuss the topic of enterprise equity financing, for the reference of operators.

I. Enterprise equity financing and investment funds

According to the different financing means, there are two kinds of enterprise financing: debt financing and equity financing. Debt financing refers to the incorporation of funds needed for enterprise development by borrowing from financial institutions, enterprises or individuals, and the use of funds for enterprise operation in the form of corporate debt. Creditors have creditor's rights to the company, but do not enjoy the rights of shareholders, and have no right to participate in the company's operations and dividends. After the expiration of the loan term, the enterprise shall repay the principal and interest in accordance with the agreed standards. On the financial statement, debt financing will increase the company's liabilities. The advantage of debt financing is that it does not dilute the company's equity, and creditors do not participate in the company's operation and dividend; The disadvantage is that it will increase the company's liabilities, and the principal and interest need to be repaid after maturity. The so-called equity financing refers to the financing of enterprise shareholders by selling part of their equity, introducing new shareholders in the way of enterprise capital increase, and obtaining funds needed for enterprise development. The advantage of equity financing is that it will not increase the company's debt, and there is no problem of returning the principal and interest after maturity; The disadvantage is that it will dilute the company's equity, and the new shareholders will participate in the company's operation and dividends, and share the growth and profit of the company with the old shareholders. Debt financing and equity financing have their own advantages and disadvantages. However, due to the current financing difficulties of small and medium-sized enterprises and the fact that equity financing will not increase liabilities, many enterprises, especially those in the rapid development period, are more willing to solve the problem of enterprise development funds through equity financing. As far as equity financing is concerned, the object of financing is mainly investment funds. Under normal circumstances, investment institutions mainly invest in angel investment (1-5 million investment quota), venture capital (VC) investment (5-10 million investment quota), private equity (PE) investment (more than 10 million investment quota), and the purpose of investing in enterprises is mainly to obtain high return opportunities. In addition to investment funds, enterprises can also raise corporate development funds from individuals or enterprises in the form of equity financing, but the financing scale of this channel is generally limited.

Second, the enterprise equity financing time window

When is equity financing better for enterprises? The question is inconclusive. It is generally believed that first of all, the equity financing of enterprises should consider the capital needs of enterprises. If the cash flow is abundant and the enterprises have no capital needs in the medium and long term, equity financing is generally not recommended. Because equity financing will dilute the company's equity, the new shareholders will participate in the company's operation and dividends, and share the growth dividend with the old shareholders. Secondly, the equity financing of enterprises should not be considered until the cash flow is tight. Because the cash flow is tight when the enterprise financing pressure is large, and the financial statements are not beautiful, at this time the enterprise financing will be very passive. Therefore, the best situation is for enterprises to plan their equity financing needs in advance and conduct equity financing according to the company's financing plan when the company is in the peak period of operation. The financing case of Alibaba gives us a good inspiration. Each round of financing of Alibaba is just right, realizing the so-called capital operation mode of repairing houses when the sun is shining, successfully enhancing and amplifying the market value of the enterprise, and each financing also properly supports the steady development of the business. Practice has proved that the basic principles of Alibaba's financing process are also applicable to all start-ups. The details are as follows: (1) Do not wait until there is no money to finance, all banks and investors risk control is to look at cash flow. (2) In the case of good cash flow, enterprises should plan financing in advance and prepare for a rainy day. (3) When looking for investment partners, focus on the added value that investment partners can bring, such as brand, corporate governance and technology. (4) We should pay attention to the long-term development of the company and find long-term partners.

Third, enterprise equity financing valuation method

Corporate valuation is often the first issue to be discussed when raising equity. The company valuation not only determines the amount of enterprise financing, but also determines the release proportion of the founder's company equity, which is a problem that founders and investors are particularly concerned about. In general, there are several commonly used company valuation methods:

It should be pointed out that different industries use different valuation methods. For traditional industries, investors generally give priority to DCF and P/E; For high-tech enterprises, investors prefer P/E. The valuation methods chosen are different in different stages and financial situations of enterprises. If the invested enterprise is in the early and middle stage of development and has not yet achieved profit, investors will use P/S and P/B more often. If profit has been achieved, investors use P/E, DCF and PEG more; If the invested enterprise is already in the middle and late stage of development, the company has often achieved profit, and the development in all aspects has been relatively mature, and the listing expectation is also relatively strong. At this time, P/E and DCF are more commonly used.

How do entrepreneurs attract investors

After determining the investment intention, investment institutions will generally sign legal documents such as confidentiality agreement and framework agreement first, and then conduct industry/technical due diligence on the enterprise. After preliminary determination of industry and technical judgment, financial and legal due diligence will be carried out until the final investment decision is made and investment documents are signed. Before this, whether entrepreneurs can attract enough investors determines the success probability and quality of financing to a certain extent. How can entrepreneurs attract good investors once they have decided on a financing plan? Every entrepreneur should ponder this question. To attract investors, you need to understand their concerns. When investors evaluate investment projects, they usually focus on the following questions: Get a good look at a team; Explore two advantages - advantageous industries + advantageous enterprises; Figure out three models - business model + profit model + marketing model; Look at four indicators - operating income + operating profit + net interest rate + growth rate; Clarify five structures - equity structure + executive structure + business structure + customer structure + supplier structure; Examine six levels - historical compliance + financial norms + tax payment according to law + clear property rights + labor compliance + environmental compliance; Implement seven concerns - system compilation + regular meeting system + corporate culture + strategic planning + human resources + public relations + incentive mechanism; Analyze eight data - total asset turnover ratio + asset-liability ratio + current ratio + accounts receivable turnover days + sales gross margin + net return + operating cash flow + market share. Based on the concerns of the above investors, entrepreneurs should pay attention to the following issues in equity financing: (1) The enterprise is a growing enterprise, otherwise do not go to the investors; (2) When the cash flow is good to go to investors, when the lack of money is the most difficult financing; (3) Meet investors when you have the strongest aura; (4) When meeting investors, bring your own team; (5) Do not avoid questions, do not give vague answers, do not hide important issues; (6) Do not expect the other party to make a decision immediately; (7) Do not talk about price when you first meet, do not price at once; (8) To maintain the initiative and enthusiasm for the company's products or services, no matter how the other party criticizes; (9) Not overemphasize technical factors or intentionally complicate technical links; (10) Enterprises are their own children, but can not be emotional, do not give each other a great feeling of their own enterprises, forget how much they have paid, forget how many fixed assets, intangible assets, investment bank valuation methods basically do not value these, fully understand the valuation methods of investment banks, respect each other's career; (11) Concentrate on doing a good job in one industry, and do not tell investors that they are going to enter a new field. Operators know the concerns of investors, clear their selling points, it can be very good to attract the right investors.

5. Common system design of enterprise equity financing

Corporate equity financing is a very professional business matter. Usually, equity financing involves the protection and balance of the interests of the original shareholders, investors, founders, management and other parties. In order to better balance the interests of all parties and promote corporate financing, the relevant parties of the transaction will often design and arrange many special systems, which are as follows:

(1) Performance betting

Betting, also known as Value Adjustment Mechanism, is a valuation adjustment agreement reached between the investment institution and the target company and the controlling shareholder of the target company on the matters of investment in the target company, and it is agreed that the target company needs to achieve the agreed indicators in the future period of time. Otherwise, the controlling shareholder needs to compensate the investment institution according to the agreement of a contractual arrangement, such as buying the equity of the target company held by the investment institution, transferring the equity of the target company to the investment institution free of charge, cash compensation, etc. Since the form is whether the two parties pay consideration to the other party with a certain result, it has a certain similarity with "gambling", so it is usually called "betting". There are many indicators of gambling, such as gambling in the future period of time to achieve a certain operating performance, to meet the listing standards, through the CSRC audit, qualified IPO, to achieve a certain return on equity, to achieve a certain net profit, to achieve a certain growth rate and so on. Among them, performance betting is the most valued and most used by investors, which refers to whether the invested company can achieve the promised financial performance during the agreed period. Because performance is the direct basis of valuation, investee companies want to obtain a high valuation, they must take high performance as a guarantee, usually with "net profit" as the bet. When signing investment agreements with people, try not to set performance bets against investors, and once bets will be burdened with heavy operating pressure. If you must bet, you should adhere to the following points when setting the bet terms: (1) the investor to be introduced is a financial investment or strategic investment, if it is to control the enterprise, eat the enterprise, then resolutely cannot bet with it; (2) The betting agreement should be moderately flexible. In the case of no significant change in the macro environment, it is more appropriate to allow the company's profit to float within a certain range. Financing companies need to have more reasonable profit expectations and more conservative agreement Settings when seeking capital. The original intention of the system is to give investors the opportunity to properly adjust the valuation of the company according to the operation of the business.

(2) One veto

One-vote veto refers to the investor's request to have a veto on a specific resolution at the company's shareholders' meeting or board of directors. The purpose of the investor's veto is mainly to control the company's business behavior through a veto to ensure the interests of investors. As far as business management is concerned, it is entrepreneurs who know the industry and business management best, not investors. So the topic of investor involvement is a sensitive one. Investors can appoint directors and other ways to enjoy a certain right to participate in the company's business affairs and the right to know, but in terms of advocating a veto, operators should pay special attention to this issue. The concerns of enterprise managers and investors are not exactly the same. In many cases, the veto power of investors will seriously affect the autonomy of enterprise management, and then damage the interests of the company and all shareholders of the company. If it is necessary to agree on a veto, it is necessary to clarify its specific application when setting a veto, and remember that it cannot be broad and general.

(3) Joint sale of equity

Joint sale of shares means that when the original shareholders of the company sell their shares to a third party, PE and VC sell their shares to the third party on the same terms and conditions according to the proportion of their shares with the original shareholders, otherwise the original shareholders shall not sell their shares to the third party. The purpose of the investor's agreement on the joint sale of equity is to ensure that his exit channel is smooth, so as not to be deeply trapped in the case of the founder's escape.

(4) Strong put

A strong put is when an investor sells his shares in a company and requires the original shareholders to sell their shares. The purpose of the investor's agreement on the strong sell right is also to ensure that his exit channel is smooth, so as to avoid being able to successfully sell the project as a whole and recover the investment in the event of a hopeless project. Entrepreneurs should pay particular attention to the setting of the strong put, PE, VC in the absence of the company's prospects, it is likely to exit through mergers and acquisitions, but mergers and acquisitions exit generally want to hold, so there are companies because PE, VC requires the company's shareholders to sell shares with them, and eventually lead to the company's major shareholders of the controlling shares of others.

(5) Management gambling

Management as a bet means that when the company fails to reach a certain bet target, the investor obtains the majority of seats in the invested company and increases its control over the company's operation and management, such as appointing directors, managers, and financial officers. The main purpose of this system design is to give investors the opportunity to deeply participate in the management and ensure the controllability of the project management in the case of poor management of the operator.

(6) The right of preferential distribution of dividends

The right of preferential distribution means that when the company pays dividends, PE, VC and other investors should have priority over the original shareholders to receive dividends, or the original shareholders do not pay dividends before the PE and VC dividend distribution reaches a certain amount. The purpose of this system is to ensure the safety of the investment by investors to recover their investment in advance through preferential dividends.

(7) liquidation priority

The priority of liquidation of the enterprise means that if the enterprise is not well managed and cannot continue to operate and enters the liquidation procedure, the investor has priority over other shareholders of the company to obtain liquidation assets. If the liquidation assets fail to make up for the investor's input cost and expected profit, the major shareholder shall compensate. The main purpose of the system design is to ensure the safety of investors' funds.