Spisni, Massimo

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Almae Matris Studiorum Campus

23/04/20091Introduction to Entrepreneurial FinanceAnd Venture Capital LawGeneral Theoretical Frameworkof Law and Finance23/04/2009 Tanega:  Introduction to Entrepreneurial Finance and Venture Capital 1byJoseph TanegaReader International Financial LawUniversity of WestminsterVisiting Professor, University of BolognaThe Financial ZooForwardsFutures Common sharesSwapsPreference sharesOptionsMarket Index ContractsInterest rate linked notesWarrantsCallable bondsCurrency linked notesCommodity indexesCredit derivatives???23/04/2009 Tanega:  Introduction to Entrepreneurial Finance and Venture Capital 2BondsConvertible bondsAsset back securities Structured derivativesMortgage backed securitiesCollateralizedDebt ObligationsEmbedded options ??What are the common traits of the multitude of financial products?Money = Unfulfilled PromiseObligation OptionRoman Law: Table III DebtMauss The Gift (1925, 1954)Arrow (1964) & Debreu (1959)Sharpe (1995)Black & Scholes (1973)Bonds & fixed -income securities23/04/2009 Tanega:  Introduction to Entrepreneurial Finance and Venture Capital 3What keeps societies together What pulls societies apartSpeculative bubbles: Tulipmania (1634)Equity derivativesGlobal Eurobond marketsZero risk, some return High risk, high returnGraham & Dodd 1934“Show me the money” “Enron, Worldcom”23/04/20092Transforming Financial Instruments into Building BlocksForwardsFutures Common sharesSwapsBondsPreference sharesOptionsMarket Index ContractsInterest rate linked notesConvertible bondsWarrantsCallable bondsCurrency linked notesAsset back securitiesCommodity indexesStructured derivativesMortgage backed securitiesCollateralizedDebt ObligationsEmbedded optionsCredit derivatives?????23/04/2009 Tanega:  Introduction to Entrepreneurial Finance and Venture Capital 4Common TraitsObligation OptionalityReturnRiskReturnRiskΔ PΔ VPayout Diagramat ExpiryReturnRiskSecurity Market Line“Safest Bond”EquityModern Finance TheoryActivityProduct Life CycleActivityCorporate Life Cycle23/04/2009 Tanega:  Introduction to Entrepreneurial Finance and Venture Capital 5L        G         M       DL        G         M       DLaunchGrowthMaturity Decline“BCG Box”NoiseDecision MakerQ lit ti M th d Q tit ti A l iA tiModelsInformal Formal23/04/2009 Tanega:  Introduction to Entrepreneurial Finance and Venture Capital 6ua a ve e o s uan a ve na ys sssump onsInterpretationJudgmentBuy Hold Sell23/04/20093ReturnBond-likeEquity-likeAsset Classes54 Preference SharesCommon StockOptionsConvertible Bonds23/04/2009 Tanega:  Introduction to Entrepreneurial Finance and Venture Capital 70      1     2     4     5     6    7     8     9     10     Risk3210US TreasuriesGov’t BondsCorporate Bonds0.200.150.10E(R)fghijkrij = -1.00rij = +0.00rij = +1.00223/04/2009 Tanega:  Introduction to Entrepreneurial Finance and Venture Capital 80.00  0.01  0.02  0.03  0.04  0.05  0.06  0.07  0.08  0.09  0.10 0.11  0.120.050.00Standard Deviation (σ)rij = -0.50rij = +0.501Bond Price Stock PriceInterestraterisesFalls Falls23/04/2009 Tanega:  Introduction to Entrepreneurial Finance and Venture Capital 9InterestratefallsRises Rises23/04/20094Fundamentals = Expected future cash flows(1 + appropriate discount rate)ExpectedSpendingExpectedPrices23/04/2009 Tanega:  Introduction to Entrepreneurial Finance and Venture Capital 10Expectedreal interestratesPerceivedrisksExpectedinflation ordeflationWarPoliticsTaxesDebt burdenAsset ClassMarketPremiseBusiness conditionsStronger thanexpectedInflationhigherthanexpectedBusinessconditionsweaker thanexpected InflationLower thanexpectedFixed income 23/04/2009 Tanega:  Introduction to Entrepreneurial Finance and Venture Capital 11EquitiesForeign exchange(US Dollar)Capital MarketsDebt EquityBankloans BondsCommercialpaper Leases CommonPreferred USPreference UK WarrantsAdapted from Grinblatt & Titman (2002) p. 523/04/2009 Tanega:  Introduction to Entrepreneurial Finance and Venture Capital 1223/04/20095Capital MarketsDebt EquityMajorFinancialInstrumentsBil t l23/04/2009 Tanega:  Introduction to Entrepreneurial Finance and Venture Capital 13a eraRights& DutiesDeepLegalPrinciplesOffer Acceptance Conditions ContingencyEnforceability Void VoidableExecutoryRemediesContract Life CyclePre formation Formation Performance Breach RemediesDischargeNegotiationsOfferAcceptanceConsiderationPartSubstantialCompleteBy contractBy performanceBy agreementDamagesLiquidateddamagesQuantummeruitCommonLaw23/04/2009 Tanega:  Introduction to Entrepreneurial Finance and Venture Capital 14-PuffingRepresentationsCapacityCertaintyDefinitenessTermsConditionsContingenciesBy frustrationBy breach of contractEquitableSpecific PerformanceInjunctionsRescissionRectificationManaging the Justice System Risk CurveOptimizeJustice SystemResourcesSettlement &Litigation RiskAppealsRiskPoliticalChange of LawFlaunting &Disobedience Mass RevoltRiskPoliticalDecisionsSocialEthicalLegalRegulatoryRisk of Budget Timing of Cash FlowAmount of Public Budget23/04/2009 Tanega:  Introduction to Entrepreneurial Finance and Venture Capital 15 Risk RiskProbabilityProbability of Injustice< Investment at Risk Exceptional Injustice0Expected JusticeLossInjustices absorbed by public investment at riskInjustices not overturned by Justice System123/04/20096Credit Crisis Risk and Legal Risk ManagementOptimizeJustice SystemResourcesSettlement &Litigation RiskAppealsRiskPoliticalChange of LawRiskFlaunting &DisobedienceRiskMass RevoltRiskPoliticalDecisionsSocialEthicalLegalRegulatoryRisk of Budget Timing of Cash FlowAmount of Budget23/04/2009 Tanega:  Introduction to Entrepreneurial Finance and Venture Capital 16ProbabilityProbability of Injustice< Investment at Risk Exceptional Injustice0Expected JusticeLossInjustices absorbed by public investment at riskInjustices not overturned by Justice SystemCredit Crisis Risk 1

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