F Co is private, owned 60% by founder, 20% each by two children.
Needs a large amount of long-term finance within 3 months.
IPO rejected because it would take up to 12 months.
Venture Capitalist (VC) offers finance (debt + equity) but wants:
60% of equity
25% annual return
A board seat
Veto over all expenditure over a certain level.
Question: From the family’s perspective, which are advantages of using the VC?
Option-by-option
A. The cost of the finance – DISADVANTAGE
A required return of 25% and taking 60% of the equity is expensive; the family is giving up control and paying a high expected return. That’s not an advantage.
B. Changes in shareholding – DISADVANTAGE
Post-investment, the VC would own 60%, the family only 40% collectively. They lose control. That’s clearly a downside for them.
C. Veto on expenditure – DISADVANTAGE (for the family)
A VC veto on capital and revenue spend restricts management/family autonomy. While it may improve governance, it’s not an “advantage from the family’s perspectiveâ€.
D. Speed with which finance can be obtained – ADVANTAGE ✅
VC money can typically be arranged much faster than an IPO, which is crucial because the company needs funds within 3 months. This is explicitly given as a reason IPO is not suitable.
E. Experience of the Venture Capitalist with growing businesses – ADVANTAGE ✅
VCs often bring expertise, contacts, and strategic guidance in scaling businesses. From the family’s point of view, this support can increase the chances of successful expansion.
So the genuine advantages to the family are:
D (speed) and
E (experience).
