Transcript Document

Lecture 13
Everything you wanted to know
Housekeeping
Course Evaluation Questionnaire
Discussion of Course
What worked and what needs
improvement
Giving a Good Talk
Types of Corporations
Accounting 101
Thoughts on Entrepreneurship at Caltech
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Housekeeping
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On Thursday, we will have a rehearsal.
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On Friday we will have the Final
Presentations
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Get everyone involved
Enthusiasm, confidence
Fact-based
Avoid hyperbola
Final paper is due at midnight on
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Tell me what you are going to tell me
Ask questions on approach
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A Great Talk – thanks Tony
Luna
Point of View
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Continuity
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Vocab, eye contact, gestures, voice
projection
Simple Message
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Consistant thread carried throughout
Professionalism
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Experiences, influences, human condition
Clear takeaway
Uniqueness
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Original
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voice
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The concept of “Lessons Learned”
Performed usually after a project is complete
 Object
to benefit from an analysis of history
to avoid repeating error
to learn what works
Cycles of Learning
 Forgetting curve
Supplements “benchmarking”
Learning from the best
Applying lessons to next iteration
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Apply to new company
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Don’t make dumb mistakes you could have avoided - make your
own dumb mistakes!
Examine case histories (retrospective analysis- especially in
analogous space)
Interview participants
Examine clichés
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Huge markets
Hockey stick
First mover advantage
Put people on advisory Board with multiple and diverse
experiences
Smart money Investors
Appropriate modesty about predictive ability of Business PlansThink risk, Think Contingency Planning
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On the back of the paper write
1. What did I like best about this
course?
2. What could be improved?
3. Did it meet my expectations?
4. Any other comments?
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E 102 What worked/didn’t work
for you Score 1-10 (10 high)
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Met Expectations
Team formation
Problem selected
Team activities
Lecture/HW
presentation format
Ken
Vedran
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Guests
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Bill Collins
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Chris Halliwell
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Sales
Marketing
Gil Elbaz
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What worked/Didn’t Work
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Tech Coast Angel meeting
Pasadena Angel Meeting
Mentors
Making contacts
Making presentations
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Team Experience in E102
Has it worked?
What went right?
What went wrong?
How could the process be improved?
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Please go online and fill out
TQFR Survey
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Entrepreneurship
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Creation of a nation’s wealth
Creation of jobs
Creation of great products
Creation of leaders
Complements and funds great science
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Subjects for Today
Company Types
Financial Statements
 Income Statement
 Balance Sheet
 Cash Flow Statement
Gross Margin of Product
Important Negotiation Tools
 Term Sheet
Choices
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Sole Proprietorship
Partnership
“S” Corporation
“C” Corporation
Limited Liability Corporation
“C” Corporation
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Company continues regardless of incapacity or
death of one or more stockholders.
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Can have ownership changes without disturbing
ability to conduct business.
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pays taxes and dividends are also taxable to
stockholders.
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Corporate shield protects other investments and
savings of the stockholders
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The annual meetings of stockholders can provide
more comprehensive guidance for management.
Depending on the corporation's business record and
the policies and practices of prospective lenders,
access to credit and the ability to secure needed
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“S” Corporation
“C” Corporation vs. “S” Corporation - What's the
difference?
“S”=“C” with one exception
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“S” corporation has a single tax imposed at the
shareholder level
"C" corporation has a tax imposed both at the
corporate level and then again when the corporation
makes a distribution to the shareholders.
To be eligible for “S
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Less than have more than seventy-five shareholders, all of
whom must be individuals or certain trusts in estates,
one class of stock outstanding.
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“C” Corporation
Disadvantages
Lenders may require personal guarantees from corporate officers as a
condition of supplying credit, thus negating the limitation of liability.
Conflicts or disagreements among the stockholders (usually a small
group of persons) may immobilize decision making.
Restrictions on the sale of stock and/or buy-back agreements included
in the bylaws may prevent minority stockholders from being able to
recover the value of their investment in the corporation.
If appreciated assets are owned by the corporation and the
corporation is dissolved, significant income taxes on the appreciation
amount will be generated.
The corporate shield of limited liability may be lost:
 When corporate formalities are not followed — that is, when
director and shareholder meetings are not held and minutes of
such meetings are not kept.
 When corporate assets are treated as personal assets — for
example, when a corporate vehicle is used for family vacation and
the corporation is not reimbursed for the nonbusiness use.
When limited liability is lost, shareholders become personally liable
for any corporate legal or financial obligations. In addition, if corporate
income tax returns are audited, failure to observe corporate formalities
or treating corporate assets as personal assets can cause penalties
and interest years.
Sole Proprietorship
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Business entity and your other affairs (personal and
business) are merged. As the proprietor, you own
and control the business.
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All proprietorship debt is payable by the proprietor
(proprietor's family unit)
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lenders customarily require signatures on debt
agreements by both the proprietor and spouse
All profits accrue to, and all losses are borne by, the
proprietor (the family).
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Must separate finances and records for your
business unit and your household.
Sole Proprietorship
Advantages
 Simplicity and flexibility.
 established, modified, bought, sold, or terminated very
quickly.
 No organizational arrangements (bylaws, organizational
charter, etc.) required
 Only routine permits and licenses required
 legal assistance not required to start, terminate, redirect, or
modify the business.
 The proprietor can decide to start a business and almost
immediately can say, "I'm open for business and I'm my own
boss.“
Limitations
 mingling of business and household finances often occurs
 everything the proprietor and family own can be at risk in
both personal and business activities
 the resource base limited including credit availability and
capacity to respond to business opportunities
Partnership
An association of two or more persons formed to carry
on a business each of whom has a specified
ownership interest
General Partnership or Limited Partnership
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Most business partnerships are organized as
general partnerships. In many, the partners are
related by blood or by marriage
(Should be) based on a written agreement
Typically not an income tax paying entity
Profits and losses pass through to the partners'
individual tax returns in proportion to their
respective ownership interests.
Unless specified otherwise, partnership is
dissolved upon the death or withdrawal of one of
the partners.
Partnership
Advantages
 easy
 In a general partnership partners can
specialize
 In a limited partnership only the general
partner can be manager
 Limited partners enjoy a limited liability
 Borrowing capacity of a partnership may be
greater than the total borrowing capacity of
the partners as individuals.
 Cost of establishing a partnership is
relatively low , record keeping and tax filing
relatively easy
Partnership
Limitations
 General partnership- all assets of each partner are at
risk
 Limited partnership- all assets of the general partner
are at risk and capital invested by the limited
partners is at risk.
 Any partner in general partnership and the general
partner of a limited partnership can enter into
contracts binding on all
 General partnership can end upon the death or
divorce of any partner
 Any general partner can require dissolution of the
partnership at any time.
 It may be very difficult to get out of a partnership
without undue financial loss Conflicts can
immobilize business decision making
Income Statements
A record of a companies earnings or
losses for a given period.
Shows all of the money a company
earned (revenues) and all of the money
a company spent (expenses) during
this period.
The basic measure of profitability.
Sample Income Statement
Wilma's Widgets Income Statements for the Years Ending 1998 and1999
1998
1999
Net Sales
Less Cost of Sales
Gross Profit on Sales
$900,000
$990,000
(250,000) (262,500)
650,000
727,500
Less General Operating Expenses
Less Depreciation Expense
Operating Income
(120,000) (127,500)
(30,000)
(30,000)
500,000
570,000
Other Income
50,000
Earnings Before Interest and Tax 550,000
Less Interest Expense
(30,000)
Less Taxes
(50,000)
Net Earnings
470,000
30,000
600,000
(30,000)
(54,500)
515,500
Income Statement
Net Sales = Gross sales - Returns
 Company’s “top line” revenue from its main or core
business. (Issue how do you define revenue?)
Cost of Sales
 What did it cost the company to directly produce or
generate the goods or services represented in the
net sales figure.
 Includes direct costs such as raw materials or
acquisition cost of the goods
 Does not include indirect spending
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Marketing
Sales, or Administrative expenses
Income Statement
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Gross Profit = Net Sales – Cost of Sales
Operating Income = Gross Profit – Operating ExpensesDepreciation
where Operating Expenses comprise
 SG &A Selling General and Administrative Expenses.
 general overhead, administrative, sales, marketing, and
some other expenses are listed. In general, operating
expenses are the costs (expenses) associated with
keeping the doors open, generating business, and filling
orders
 R&D expense
 Expense associated with developing new products
 How much is appropriate?
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And Depreciation is
Income Statement
Depreciation
Records the loss in value of a fixed asset.
 Purpose is to spread the initial purchase
price of the fixed asset over its useful life.
 Used for purchased machines, equipment
,some software
 A "non-cash" charge. i.e. no money is
actually paid at the time in which the
expense is incurred.
 Operating
Margin = Operating
Income/Sales
How profitable are the
companies lines of business?
Income Statement
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Earnings before Interest and Taxes
(EBIT)=
Operating Income – other income (loss) –
extraordinary income (loss)
Income Statement
And Finally, the bottom line
Net Earnings=
EBIT – Interest expense (income)- tax
expense (refunds)
Income statement
EBITDA (Earnings Before Interest, Tax,
Depreciation and Amortization –
EBITDA)
How much money a company would
have made if it didn’t have to pay
interest on its debt, taxes, or take
depreciation and amortization charges.
What is the value of EBITDA?
Some Key issues with income
statements
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Check year to year trends
Can still go broke with a profitable business
Compare with competitors/industry
Check R&D expense as a % of sales. Is it
appropriate?
Look at each of the line items and test for
robustness.
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e.g. What is the interest expense? From Balance
sheet what would happen if interest rates rose?
Gross Margin
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Each product has a gross margin
Gross Margin= price - direct cost of
product
Products can be created and pruned on
the basis of their Gross Margins.
Issue with Internet is that the Gross
Margins were too thin
Gross Margin of Product
Gross Margin =Sales Price – Cost of Sale
Consider GM1=SP1-CS1
GM2=SP2-CS2
GM3=SP3-CS3
Can compare and decide which to build
Balance Sheet
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The theoretical value of the enterprise if
you were to purchase it, liquidate the
assets, and shut its doors
Unlike an income statement, it doesn’t
cover a range of dates but is a
snapshot.
Why is this statement important?
Balance Sheet
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Assets include all the things of value that are
owned or due to the business
Liabilities represents a company's
obligations to creditors
Stockholders Equity represents the owners’
investment in the company
Basic “Law”
Assets = Liabilities + Stockholders Equity
Balance Sheet
Assets
Current Assets mature into Cash in <12 months
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Cash
Accounts Receivable (A/R)
Inventory (Inv)
Notes Receivable (N/R)
Prepaid Expenses
Other Current Assets
Non-Current Assets mature into cash > 12 months.
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Net Fixed Assets
 Land
 Building
 Machinery and Equipment
 Furniture and Fixtures
 Leasehold Improvements
Investment into Subsidiaries
Intangibles
Other Assets
Balance Sheet
Assets (cont.)
Intangibles
 Goodwill (examples a strong brand
name, good customer relations, good
employee relations)
 Research and Development
 Patents
 Market Knowledge
 Organizational Expense
Balance Sheet
Liabilities
Current liabilities need to be paid in < 12 months
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Accounts Payable -- Trade (A/P)
Accrued Expenses (e.g. wages)
Notes Payable -- Bank
Notes Payable -- Other
Current Portion of Long term Debt
Non-Current Liabilities obligations that are due in >
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12 months
Non-current Portion of Long Term Debt
Contingent Liabilities (e.g. guarantees, lawsuits)
Balance Sheet
Stockholders Equity
Stockholders' Equity the remainder of
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the company's assets
Common stock
Preferred stock
Treasury stock
Retained earnings
Some Financing Issues
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Advantages and Disadvantages in
Financing (getting cash) through Debt
or Equity i., e., bonds/loans or stocks
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For new company
For established company
For fast growing company
For business cycle company
Debt to Equity Ratio
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How is this a function of industry?
Transportation and warehousing
Air transportation
Finance and insurance
Debt to
equity ratio
3.4
Debt to
equity ratio
Commercial banking
15.1
Savings institutions, credit unions &
other
13.8
Arts, entertainment, and
recreation
Debt to
equity ratio
Other arts, entertainment, and recreation
5.1
Amusement, gambling, and recreation
industries
2.6
Agriculture, forestry & fishing
Agricultural production
Utilities
Electric power generation, transmission
& distribution
Debt to
equity ratio
1.6
Debt to
equity ratio
2.2
Cash Flow Statement
Period statement does not have to
balance
Financial document detailing the exchange of
cash between a business and the outside
world
 From Operations
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Flow from Financing
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cash made (lost) by selling goods and services
cash company raised by selling stocks and bonds
Flow "out" to Investing
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cash the company spent investing in its future
growth
Consolidated Financial Statements
Cash Flow Statement
(
(dollar figures are in
thousands)
Earnings
1997
1996
$ 1,911
$ 1,374
1,024
783
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-16
2,978
2,141
Non-cash
Adjustments:
Depreciation
Other Adjustments to
Earnings
Net Cash provided
from Operations
Cash Flow Statement (cont.
Proceeds from Issuing New
Stock
Payments to Repurchase Stock
384
247
-396
-278
Stock Dividends Paid
-10
Net Cash provided from
Financing
- 22
- 31
Entrepreneurship
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Positives
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Act of Creation
Passion
Habit-Forming
Large potential cash-outs
Negatives
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Failure is the Norm
24/7 existence
Compromises
family,
building a “total” rounded person
Self doubt
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Subjects very imperfectly
covered
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Ethics
Financing
Corporate structure
Choosing a Team
Operational challenges
Liquidity Events
Legal considerations
Human Resources
Outsourcing
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For the final, consider including Ethics
and Social Responsibility guidelines for
your company.
History of Entrepreneurship Classes
at Caltech
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Started by Prof. John Baldeschwieler c. 1995
Entrepreneurial Fellows Program 2001-2002
Ken takes over E 102 in 2003. This is the tenth
iteration
Many professors have contributed to this class
Some projects (typically in a different form) have
gone on to be businesses
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Major advantages for
students
(my view)
Learning something about business.
Remember the synthesis argument.
Learn something about
Entrepreneurship
Helpful for self-exploration
Realistic problems to work on
Team skills
Helpful in interviewing for consulting or
technology positions
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Issues (my darkest view)
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Superficial- one quarter
Not an accurate simulation- an
academic exercise
I tell you what to do. This is not how
entrepreneurship works
Varying degrees of commitment
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My course line-up
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Fall, Winter: ME 105 a,b Design of
Products for the Developing World
Spring 2012: E 102 Entrepreneurial
Development
Spring 2013: ME 103 Management of
Technology
Also, Independent Study Courses
SURFs
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Caltech and Entrepreneurship
A Virtuous Cycle
Research funding
Caltech
Basic
Research
and
Education
Corporate
New
Product
Profits
Taxes and job
creation
Spinout
New
Company
IPO
Wealth
Taxes and job
creation
Philanthropy
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Acknowledgements
Vedran
Mentors
Speakers
Professors and student idea providers
Class
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