company selling socks and all of that, has been raising

money from an equity.

We raised private money-- when the company was private it

went to VCs and it went to angel investors, and maybe you

could go to your friends and family to raise money.

And then the company could go public and raise money from

the public markets.

But there's actually two ways that a

company can raise capital.

So this is why this playlist is called capital markets, or

it's part of it, the name of raise capital.

Capital is just essentially-- I mean the easy way to think

about it is you're raising cash that you want to invest

in some way to grow your business or to sustain your

business or start your business.

So everything we talked about so far was equity, and that's

essentially selling shares in your company to raise money.

And so that's all of those VC examples.

The equity investor-- so when you sell equity, you're

essentially selling-- you're kind of making that person

who's buying the stock-- you know, an equity is the same

thing as stock-- you're making the person who's buying a

stock kind of a partner in the company.

So if the company-- let's say there's two situations-- if

the company goes bankrupt-- and I'll talk a lot more about

what bankruptcy even means-- but if the company goes

bankrupt, all the shareholders end up with nothing.

They end up with nil.

But if the company has a lot of upside, the stock gets a

lot of upside.

Because they're partners in it.

If this was a company, that start-up that we talked about,

if it turns into Amazon.com and becomes a billion-dollar

company, everyone is going to do really well.

Everyone's going to share in that upside.

But there's another way to raise money, and actually this

is probably something that's more familiar at

the household level.

I mean at the household level you never raise equity.

You never say, you know what-- well you can, but you're not

going to say hey, I need to buy a house, why don't I go to

my rich friend and offer to sell 10% of the stake in my

house to him and he'll be kind of a partner in my house.

That could happen but for the most part it doesn't.

Usually when you do something on a personal level you raise

money through debt.

And that's interesting.

So what's good about debt is it's-- so let's think about it

from the point of view of the person who's lending

the money to you.

Debt is just borrowing money.

I think all of us know what borrowing money is.

I go to my rich friend and I say hey, could I borrow $1 and

I'll give you $1.25 in a year?

And he says, OK, you're good for it.

But I'm essentially promising I'm going to give the money

back at some future date.

If I sell equity, I'm not promising anything.

I'm like hey, I got a great business, why don't you give

$1 and then you get a 20% cut of my business.

If my business does awesome, you get 20% of all of the

profits of my business.

If my business does horrible, well you took a risk, you get

nothing and I get nothing.

Debt says regardless of how my business does, if it does

awesome all you're going to get is the interest.

That's kind of the upside.

So the upside's limited, right?

If I borrow money at 9% interest, all that person's

going to get is 9%.

Even if my company becomes the next Google or Microsoft or

whatever else, that person's just going to

get 9% on their money.

While this person might have gotten a hundred times their

money because they made a bet.

On the other hand, this downside is much lower.

So limited downside.

Because they're going to get their money back at a

certain-- you know, there's a certain payment schedule.

And they're going to get their money back before the

stockholders-- so let's say in a situation where the

company's going into difficulty-- and we'll do a

whole playlist on bankruptcy-- the people who lend money to

the company will see their money before the stockholders

see anything.

So how does all of this come out from the balance sheet?

So let's say we have a public company.

If you wonder what a CFO at a company does, this is really

the main decision that they're always making.

Do we raise money-- well, how do we raise money if we need

it, and do we raise money from the equity markets or from the

debt markets?

So let's come up with a company again.

Let's say that that's its current assets.

Not current-- I don't want to say current assets, it's the

assets that it currently has.

Current assets means something different, and we'll talk

about that in the future.

But let's say, so that's its assets.

You know it might have some cash here.

We'll go into more detail.

We'll actually look at real company balance sheets and

decipher what all of the terms on the balance sheet mean.

But that's its assets for now.

And let's say right now all of its money it's raised so far

has been equity.

And let's say it's a publicly listed company.

It doesn't have to be.

Let's say that's all of its equity, and let's say it has,

I don't know, 10 million shares.

And the other interesting thing about when a company's

public-- remember, every time when a company was private and

it took an investor, when it took equity investors, they

had to sit and have a negotiation saying what is

this worth?

What are these assets worth?

But what's cool is, is when you have a publicly traded

company, these shares are traded on an exchange, right?

These shares are on, let's say it's on the

New York Stock Exchange.

So every day you could go to Yahoo!

Finance or wherever and you can look at a chart.

Let me draw a chart.

You can draw a chart.

And we've all seen stock charts, I think.

So let's say that this is this could have been its IPO date

or it could just be the start that we're looking at, and

let's say the stock IPO went up, and then the whole market

went down a little bit.

But the stock-- maybe it's there, right?

But on any given, really almost any given second,

there's a price that somebody traded that stock at and it

might not be the best price, but it is a price.

And we'll talk about why that happens, because you might

have 10 million shares, and if only, I don't know, 100 shares

get traded at any second, or let's say only 100 shares get

traded in the day, is that an indicative price?

Because that's not a huge percentage

of all of the shares.

But anyway, we'll talk more about what volume means

relative to the total float and all of that.

But let's say at this split second the company shares

traded at $15 a share.

This is $15, right, at this second in time.

This is like right now.

Traded at $15 a share, and you could look it up on your

Bloomberg terminal or whatever else.

So essentially the market is providing us a

value for this company.

The market is saying wow, the market is willing to trade the

share at $15.

There was a willing buyer and a willing seller at exactly

$15 a share.

So that means that the market at that moment is valuing this

company at $15 per share times 10 million shares.

So $15 per share times 10 million shares-- not

necessarily a dollar sign.

So the market is assigning a, 15 times 10 is 100.

$150 million market cap.

Market capitalization for the company.

And you could look on the kind of, I think it's the key

statistics tab on Yahoo!

Finance, and you'll see market capitalization for a company.

And it's just the number of shares times the

price of the shares.

This is essentially what the market's value

of the equity is.

The market is saying that this piece right here

is worth $150 million.

And since this piece is the same size as the assets, we

have nothing else on the right-hand side, the market's

essentially saying that the assets right now are worth

$150 million.

And these aren't always going to be equal.

We'll see probably in a few videos when you start raising

debt you have to do an extra calculation to figure out what

the asset value or-- and I'll throw out a new term here, the

enterprise value of the firm is.

The enterprise value's essentially the asset value

minus excess cash.

The cash the company really doesn't need to operate.

And we'll go into more detail of that.

But we'll just view it as the assets for now.

So if I'm the CFO of this company, and let's say we need

to raise another, I don't know, $15 million.

I have two options.

I could say OK, the company is trading at $15 per share, I

need to raise $15 million, so I could issue

another million shares.

It wouldn't be the initial public offering because I'm

already public.

It would be a follow-on offering, or sometimes it's

called a secondary offering.

Although the word secondary has kind of two connotations.

But it would be a follow-on offering where I would issue,

I'd go to the board, we would essentially create another

million shares, and then sell them into the market, and

hopefully people will buy it at $15 a share or probably a

little bit less because we're kind of flooding the market

with a ton of shares.

Maybe they buy it at $14 per share, and we

would raise $14 million.

And that would be a follow-on offering.

So we can always use the public markets as a way to

raise more money.

We didn't have to go to all this-- I mean, for the most

part we didn't have to do this huge valuation exercise and

negotiations and do all of this, hire banks and all that.

Although the banks will still collect fees.

We actually would have to hire banks to do this.

So that's one option.

Or the other option is we're an established company, we're

generating cash, we could make interest

payments if we want to.

We could go to a bank.

And actually there's a lot of different ways to do this.

But we could essentially borrow money.

And let's just say we do that.

Instead of doing this-- let's say we do both.

So let's say we did a $1 million follow-on offering,

that gave us $14 million.

And let's say we want another $2 million, but this time

instead of selling shares-- so right now how many

shares do we have?

We sold 1 million, we had 10 million, we

have 11 million shares.

Let's say, you know what, let's say as a CFO I feel like

our shares are going to move up a lot more.

So we don't like selling them at this low price.

And let's say interest rates are really low.

Instead we're going to borrow money.

That's essentially raising debt.

So let's say we borrow another $3 million because we need it.

So actually this would be debt, $3 million of debt, and

we would get $3 million of cash.

So now our assets are all of this stuff on

the left-hand side.