Capital market
Capital is long-term money a business uses for buildings, machines and growth. The capital market is the market for long-term funds (more than one year). Savers, banks, insurance and mutual funds supply money; companies and governments use it.
- Instruments: equity shares (ownership), preference shares, debentures and bonds (loans to the company).
- It has two parts: the primary market (new issues) and the secondary market (stock exchange, where existing securities are traded).
- The money market, by contrast, deals with short-term funds (up to one year).
- A market regulator (for example SEBI in India, the SEC in the USA, the FCA in the UK) protects investors.
Primary market and methods of issue
In the primary market (new issue market), a company sells new securities for the first time and the money goes to the company. The secondary market only changes who owns existing shares.
Methods of issue
- Public issue / IPO (initial public offer): the company invites the general public to buy shares through a prospectus. A later public issue by a listed company is a follow-on public offer (FPO).
- Offer for sale: existing large shareholders (or an issuing house) sell their shares to the public; the money goes to those sellers, not the company.
- Private placement: shares are sold to a small chosen group, such as banks, mutual funds or rich investors. Quick and cheap.
- Rights issue: new shares are first offered to existing shareholders in proportion to what they hold, usually at a discount.
- e-IPO and book building: applications through the exchange's online system; price is found from bids within a price band.
- Employee stock options (ESOP): shares offered to employees at a lower price.
Angel investors
An angel investor is a wealthy individual who invests their own money in a very young startup, often at the idea or prototype stage, in return for equity (a share of ownership) or convertible notes.
- Amounts are small (for example ₹25 lakh to ₹2 crore, or US$25,000 to US$500,000).
- Angels are often successful entrepreneurs; they give advice, contacts and mentoring, not just money.
- They take very high risk: many startups fail. Some angels join angel networks to share deals.
Venture capital
Venture capital (VC) is money from a fund run by professional managers. The fund collects money from investors (pension funds, rich families, companies) and invests it in a few high-risk, high-growth startups.
Features
- Equity participation: VC takes shares, not a loan; no interest or fixed repayment.
- Long-term: stays 5 to 10 years.
- Hands-on: takes a board seat and helps with strategy, hiring and contacts.
- Exit: sells its stake through an IPO, a sale to another company, or to another investor; profit comes from the rise in value.
Stages of VC financing
Seed (idea, prototype) → early stage / Series A (first sales) → growth / Series B, C (expansion) → late stage / bridge (preparing for IPO).
Angel vs venture capital
Angel: one person, own money, earlier, smaller amounts, informal. VC: a fund, other people's money, later, larger amounts, formal checks (due diligence) and board seats.
Valuation and dilution (how much do investors get?)
Pre-money value = what the company is worth before the new money. Post-money value = pre-money + investment.
Investor's share = investment ÷ post-money value.
When new shares are issued, every old owner's percentage falls: this is dilution. Founders accept it because the money helps the company grow, so a smaller slice of a bigger pie can be worth more.
Key formulas and definitions
- Post-money value = pre-money value + investment
- Investor's share (%) = investment ÷ post-money value × 100
- Founder's new share = old share × (pre-money ÷ post-money)
- Primary market: money → company · Secondary market: money → selling investor
Worked examples
1. A VC invests ₹10 crore in a startup with a pre-money value of ₹40 crore. Find the post-money value and the VC's share.
Post-money = 40 + 10 = ₹50 crore. VC share = 10 ÷ 50 = 20%.
2. A founder owns 100% before an angel invests ₹1 crore at a pre-money value of ₹4 crore. What does the founder own after?
Post-money = ₹5 crore. Angel = 1 ÷ 5 = 20%. Founder = 80%.
3. After the angel round above (founder 80%), a VC invests ₹15 crore at a pre-money of ₹45 crore. Find the founder's new share.
Post-money = ₹60 crore. VC = 15 ÷ 60 = 25%. Old owners keep 75%, so founder = 80% × 0.75 = 60%.
4. A company with 10 lakh shares makes a rights issue of 1 new share for every 5 held. How many new shares are offered, and to whom?
10,00,000 ÷ 5 = 2,00,000 new shares, offered first to existing shareholders in proportion to their holdings.
5. In an offer for sale, who gets the money?
The existing shareholders who sell, not the company, because no new shares are created.
6. Founder's 60% stake is worth how much at a post-money value of ₹60 crore, compared with 100% of ₹4 crore at the start?
60% × 60 = ₹36 crore versus ₹4 crore earlier. A smaller slice of a much bigger pie is worth more.
Common mistakes
- Thinking venture capital is a loan: VC buys shares; there is no interest or fixed repayment.
- Mixing up primary and secondary markets: only the primary market raises new money for the company.
- Calculating the investor's share using pre-money value: always divide by post-money value.
- Believing the money in an offer for sale goes to the company: it goes to the selling shareholders.