Chapter 13 Test Bank Answers Financing for Startups

Test Bank

Chapter 13: Financing for Startups

Multiple Choice

1. Equity financing is defined as ______.

a. the value of the total company assets

b. the value a company earns and borrows against

c. the sale of shares of stock in exchange for cash

d. a debt incurred by a company

Learning Objective: 13.1: Define equity financing for entrepreneurs and outline its main stages.

Cognitive Domain: Knowledge

Answer Location: 13.1. What Is Equity Financing?

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

2. If an entrepreneur receives $275,000 from venture capitalists in exchange for stock, what do the investors receive in return?

a. royalties from future sales

b. equity in the business

c. access to the first round of product

d. guaranteed board appointments

Learning Objective: 13.1: Define equity financing for entrepreneurs and outline its main stages.

Cognitive Domain: Knowledge

Answer Location: 13.1. What Is Equity Financing?

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

3. The general rule of thumb for new startups is to ______.

a. avoid seeking investment for as long as possible

b. try to get as much funding as possible as soon as possible

c. immediately line up one committed investor with deep pockets

d. seek many small investments from a wide range of people right away

Learning Objective: 13.1: Define equity financing for entrepreneurs and outline its main stages.

Cognitive Domain: Comprehension

Answer Location: 13.1. What Is Equity Financing?

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

4. ______ consist(s) of small amounts of capital given to help prove a concept.

a. Direct cross-subsidies

b. Seed-stage financing

c. Startup financing

d. Early-stage financing

Learning Objective: 13.1: Define equity financing for entrepreneurs and outline its main stages.

Cognitive Domain: Knowledge

Answer Location: Stages of Equity Financing

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

5. ______ is/are provided to help implement an entrepreneur’s research and development.

a. Direct cross-subsidies

b. Seed-stage financing

c. Startup financing

d. Early-stage financing

Learning Objective: 13.1: Define equity financing for entrepreneurs and outline its main stages.

Cognitive Domain: Knowledge

Answer Location: Stages of Equity Financing

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

6. ______ consist(s) of larger amounts of funds provided for companies that have a team in place and a product or service tested or piloted, but as yet show little or no revenue.

a. Direct cross-subsidies

b. Seed-stage financing

c. Startup financing

d. Early-stage financing

Learning Objective: 13.1: Define equity financing for entrepreneurs and outline its main stages.

Cognitive Domain: Knowledge

Answer Location: Stages of Equity Financing

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

7. A/an ______ is a type of investor who uses his or her own money to provide funds to young startup private businesses run by entrepreneurs who are neither friends nor family.

a. seed investor

b. bridge investor

c. equity investor

d. angel investor

Learning Objective: 13.1: Define equity financing for entrepreneurs and outline its main stages.

Cognitive Domain: Knowledge

Answer Location: Forms of Equity Financing

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

8. Which of the following is a professional investor who generally invests in early-stage and emerging companies because of perceived long-term growth potential?

a. crowdfunder

b. angel investor

c. venture capitalist

d. friend

Learning Objective: 13.1: Define equity financing for entrepreneurs and outline its main stages.

Cognitive Domain: Knowledge

Answer Location: Forms of Equity Financing

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

9. How is a seed-stage company valued?

a. on the anticipation of future growth

b. on the value that it has on hand

c. by the number of shareholders

d. on the basis of its financial history

Learning Objective: 13.2: Illustrate the basics of business valuation.

Cognitive Domain: Comprehension

Answer Location: 13.2. The Basics of Valuation

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

10. The easiest way for startups to determine their company’s potential is to ______.

a. check out how similar companies in the same industry are being valued

b. determine the economic health of the market area

c. look at the track record of the cofounding team

d. analyze the company’s financial forecast

Learning Objective: 13.2: Illustrate the basics of business valuation.

Cognitive Domain: Comprehension

Answer Location: How Can Entrepreneurs Value Their Companies?

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

11. Even though your business may not currently be profitable, investors will want to know how many customers you have, primarily because it will show the potential ______.

a. for customer satisfaction

b. to scale the business

c. marketability

d. revenue from that base

Learning Objective: 13.2: Illustrate the basics of business valuation.

Cognitive Domain: Comprehension

Answer Location: How Do Investors Value Startups?

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

12. ______ is the company’s value before it receives outside investment.

a. Post-money valuation

b. Seed money valuation

c. Pre-money valuation

d. Startup valuation

Learning Objective: 13.2: Illustrate the basics of business valuation.

Cognitive Domain: Knowledge

Answer Location: How Do Investors Value Startups?

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

13. ______ is the company’s value after it receives a round of financing.

a. Post-money valuation

b. Seed money valuation

c. Pre-money valuation

d. Startup valuation

Learning Objective: 13.2: Illustrate the basics of business valuation.

Cognitive Domain: Knowledge

Answer Location: How Do Investors Value Startups?

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

14. ______ is a short-term loan that can be turned into equity when future financing is issued.

a. Convertible debt

b. Angel funding

c. A business loan

d. An equity loan

Learning Objective: 13.2: Illustrate the basics of business valuation.

Cognitive Domain: Knowledge

Answer Location: Convertible Debt

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

15. Which of the following is another term for convertible debt?

a. convertible bond

b. convertible stock

c. loan forgiveness

d. revolving debt

Learning Objective: 13.2: Illustrate the basics of business valuation.

Cognitive Domain: Knowledge

Answer Location: Convertible Debt

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

16. Convertible debt can turn into ______ when money is received from a venture capitalist.

a. equity

b. conventional debt

c. a convertible note

d. venture capital funds

Learning Objective: 13.2: Illustrate the basics of business valuation.

Cognitive Domain: Knowledge

Answer Location: Convertible Debt

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

17. One of the main advantages of convertible debt is that it ______.

a. doesn’t need money to be paid back

b. removes the need for valuation

c. is less expensive than other types of loans

d. eliminates a need for venture capitalist funds

Learning Objective: 13.2: Illustrate the basics of business valuation.

Cognitive Domain: Knowledge

Answer Location: Benefits and advantages

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

18. One of the main advantages of convertible debt is that it is attractive to investors because ______.

a. their risk of loss is minimized

b. they will be repaid for the loan when the company is successful

c. they may be entitled to discounts on the share price

d. they will be the first to own stock in your company

Learning Objective: 13.2: Illustrate the basics of business valuation.

Cognitive Domain: Knowledge

Answer Location: Benefits and advantages

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

19. What qualifies someone as an accredited investor?

a. only a willingness to invest

b. net worth of the equivalent being invested

c. net worth over $1 million or income over $200,000

d. net worth over $500,000

Learning Objective: 13.3: Describe angel investors and how they finance entrepreneurs.

Cognitive Domain: Knowledge

Answer Location: 13.3. Angel Investors

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

20. The typical investment range for angel investors is generally thought to be ______.

a. up to $5,000

b. up to $20,000

c. between $25,000 and $100,000

d. between $75,000 and $150,000

Learning Objective: 13.3: Describe angel investors and how they finance entrepreneurs.

Cognitive Domain: Knowledge

Answer Location: 13.3. Angel Investors

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

21. How much return does a typical angel investor expect from his or her investment?

a. Angel investors have no expectation of return.

b. double the amount invested within 2 years

c. 10 times the investment in 5 years

d. 3 times the investment within 3 years

Learning Objective: 13.3: Describe angel investors and how they finance entrepreneurs.

Cognitive Domain: Knowledge

Answer Location: 13.3. Angel Investors

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

22. In general, entrepreneurs may raise what amount through the 3 Fs?

a. up to $1,000

b. between $500 and $20,000

c. between $25,000 and $200,000

d. between $1,000 and $100,000

Learning Objective: 13.3: Describe angel investors and how they finance entrepreneurs.

Cognitive Domain: Knowledge

Answer Location: Forms of Equity Financing

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

23. ______ angels are individuals who have already started and successfully operated their own businesses.

a. Corporate

b. Entrepreneurial

c. Professional

d. Enthusiast

Learning Objective: 13.3: Describe angel investors and how they finance entrepreneurs.

Cognitive Domain: Knowledge

Answer Location: Entrepreneurial Angels

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

24. ______ angels are usually former business executives seeking profit who often are also looking to play a large part in the company.

a. Corporate

b. Entrepreneur

c. Professional

d. Enthusiast

Learning Objective: 13.3: Describe angel investors and how they finance entrepreneurs.

Cognitive Domain: Knowledge

Answer Location: Corporate Angels

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

25. Generally speaking, many corporate angels seek what within the venture?

a. a match to his or her own values

b. a higher rate of return than other investors

c. a paid position

d. global expansion

Learning Objective: 13.3: Describe angel investors and how they finance entrepreneurs.

Cognitive Domain: Knowledge

Answer Location: Corporate Angels

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

26. ______ angels sometimes seek to be paid advisers. They generally come from a profession such as lawyers or accountants.

a. Corporate

b. Entrepreneur

c. Professional

d. Enthusiast

Learning Objective: 13.3: Describe angel investors and how they finance entrepreneurs.

Cognitive Domain: Knowledge

Answer Location: Professional Angels

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

27. ______ angels, often independently wealthy, tend to invest for pleasure.

a. Corporate

b. Entrepreneur

c. Professional

d. Enthusiast

Learning Objective: 13.3: Describe angel investors and how they finance entrepreneurs.

Cognitive Domain: Comprehension

Answer Location: Enthusiast Angels

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

28. ______ angels are successful entrepreneurs who want active involvement in the companies they invest in.

a. Entrepreneur

b. Professional

c. Enthusiast

d. Micromanagement

Learning Objective: 13.3: Describe angel investors and how they finance entrepreneurs.

Cognitive Domain: Knowledge

Answer Location: Micromanagement Angels

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

29. Which type of angel is most likely to intervene if the business is not going well?

a. entrepreneur

b. professional

c. enthusiast

d. micromanagement

Learning Objective: 13.3: Describe angel investors and how they finance entrepreneurs.

Cognitive Domain: Knowledge

Answer Location: Micromanagement Angels

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

30. Which of the following describes an angel group?

a. a group formed from entrepreneur and professional angels

b. a group of investors who listen to your pitch as a group

c. a group of angels who share knowledge and collaborate in their investments

d. an angel who invests on behalf of others

Learning Objective: 13.3: Describe angel investors and how they finance entrepreneurs.

Cognitive Domain: Knowledge

Answer Location: Angel Groups

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

31. Minority business angels account for what percentage of the total angel investor population in the United States?

a. 13%

b. 0%

c. 20%

d. 25%

Learning Objective: 13.3: Describe angel investors and how they finance entrepreneurs.

Cognitive Domain: Knowledge

Answer Location: Angel Groups

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

32. What type of investment vehicle do venture capital money managers typically use?

a. bank loan

b. limited partnership fund

c. angel account

d. investment bonds

Learning Objective: 13.4: Explain the role of venture capitalists and how they finance entrepreneurs.

Cognitive Domain: Knowledge

Answer Location: 13.4. Venture Capitalists

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

33. In 1979, the venture capital industry benefited from what action?

a. an economic boom

b. the ability of a pension fund to invest in venture capital

c. federal fund availability to entrepreneurs

d. the ability of small businesses to offer stock

Learning Objective: 13.4: Explain the role of venture capitalists and how they finance entrepreneurs.

Cognitive Domain: Knowledge

Answer Location: A Brief History of Venture Capital

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

34. Which of the following spawned the growth of a whole new generation of venture capitalist companies?

a. general business growth

b. the improving economy of second- and third-world countries

c. the rise of smartphones and tablets

d. the 10-year cycle of venture capitalists

Learning Objective: 13.4: Explain the role of venture capitalists and how they finance entrepreneurs.

Cognitive Domain: Comprehension

Answer Location: A Brief History of Venture Capital

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

35. In short, VCs look for ______, big markets, and innovative ideas.

a. early seed funding

b. midsize companies

c. great teams

d. local companies

Learning Objective: 13.4: Explain the role of venture capitalists and how they finance entrepreneurs.

Cognitive Domain: Comprehension

Answer Location: How Venture Capital Works

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

36. How often will additional funding be awarded by a VC, assuming the company is growing?

a. every 8 years

b. every 10 years

c. every year or two

d. every 5 years

Learning Objective: 13.4: Explain the role of venture capitalists and how they finance entrepreneurs.

Cognitive Domain: Knowledge

Answer Location: Finding the Right VC for Your Venture

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

37. The term ______ refers to a rigorous process that evaluates an investment opportunity prior to a deal being finalized.

a. investment investigation

b. valuation

c. due diligence

d. investor assessment

Learning Objective: 13.5: Describe how investors carry out due diligence processes.

Cognitive Domain: Knowledge

Answer Location: 13.5. Due Diligence

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

38. What will be the first opportunity for the investor to sell stocks on the stock market?

a. at any time after the initial investment

b. when the company is profitable, usually after 5 years

c. with the company’s initial public offering (IPO)

d. whenever there is a buyer

Learning Objective: 13.5: Describe how investors carry out due diligence processes.

Cognitive Domain: Comprehension

Answer Location: Exits/Harvesting

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

39. What signals the end of the due diligence period?

a. within 30 days of the initial offer

b. within 6 months of the initial offer

c. when the investor has resolved all questions and issues

d. when all the issues of both parties have been resolved

Learning Objective: 13.5: Describe how investors carry out due diligence processes.

Cognitive Domain: Knowledge

Answer Location: Exits/Harvesting

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

40. What is the ultimate reason for trading equity for financial support?

a. It is more likely that the entrepreneur will build a more valuable company.

b. It is usually a deal/no deal option.

c. There will be more people interested in the company’s success.

d. Preparing for the questions asked in pitching and due diligence will ultimately improve the company.

Learning Objective: 13.6: Explain the money versus power trade-off and the funding life cycle.

Cognitive Domain: Comprehension

Answer Location: Rich or King/Queen? The Trade-off Entrepreneurs Make

Difficulty Level: Hard

AACSB Standard: Financial theories, analysis, reporting, and markets

41. This action allows the stock to be purchased on the open market and gives investors a chance to get a return of cash.

a. liquidation

b. IPO

c. exit plans and clauses

d. company registration

Learning Objective: 13.1: Define equity financing for entrepreneurs and outline its main stages.

Cognitive Domain: Knowledge

Answer Location: Stages of Equity Financing

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

42. When valuing a seed-stage, startup, or early-stage company, which of the following is most likely to be considered?

a. the company’s history of sales

b. how much time it will take for the business to become profitable

c. the length of time invested in developing the product or service

d. the amount of capital already raised by the founders

Learning Objective: 13.2: Illustrate the basics of business valuation.

Cognitive Domain: Comprehension

Answer Location: 13.2. The Basics of Valuation

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

43. Pre-money valuation is the post-money valuation minus the ______.

a. the value of the company at the end of 1 year

b. the value of the company at the end of 5 years

c. outside investment

d. cost of the obtaining the investment

Learning Objective: 13.2: Illustrate the basics of business valuation.

Cognitive Domain: Comprehension

Answer Location: How Do Investors Value Startups?

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

44. An entrepreneur is asking for $1 million for 30% of his company. What is the entrepreneur’s post-money valuation?

a. $3.33 million

b. $300,000

c. $2 million

d. it cannot be determined

Learning Objective: 13.2: Illustrate the basics of business valuation.

Cognitive Domain: Application

Answer Location: How Do Investors Value Startups?

Difficulty Level: Medium

AACSB Standard: Application of knowledge

45. A company’s pre-money valuation is $500,000 and the post-money valuation is $600,000. How much did the angel invest?

a. $5,000

b. $50,000

c. $100,000

d. It cannot be determined.

Learning Objective: 13.2: Illustrate the basics of business valuation.

Cognitive Domain: Application

Answer Location: How Do Investors Value Startups?

Difficulty Level: Medium

AACSB Standard: Application of knowledge

46. An investor offers $150,000 for 30% of the company. What is the post-money valuation of the company?

a. $350,000

b. $500,000

c. $50,000

d. It cannot be determined.

Learning Objective: 13.2: Illustrate the basics of business valuation.

Cognitive Domain: Application

Answer Location: How Do Investors Value Startups?

Difficulty Level: Medium

AACSB Standard: Application of knowledge

47. An investor has offered $150,000 for 20% of the company. The company has a pre-money valuation of $350,000. Should the entrepreneur consider the offer?

a. No; the investor is asking too great a percentage.

b. Yes; the investor is asking for less than the value of the investment.

c. No; the investor is not offering enough for the value of the company.

d. It cannot be determined.

Learning Objective: 13.2: Illustrate the basics of business valuation.

Cognitive Domain: Analysis

Answer Location: How Do Investors Value Startups?

Difficulty Level: Hard

AACSB Standard: Analytical thinking

48. In 2018, venture capitalists invested in ______ of seed-stage companies.

a. 15%

b. 7.5%

c. 25%

d. 1.5%

Learning Objective: 13.4: Explain the role of venture capitalists and how they finance entrepreneurs.

Cognitive Domain: Knowledge

Answer Location: 13.4. Venture Capitalists

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

49. Venture capitalists look for ventures that will earn them ______ times their original investment.

a. two to five

b. five to ten

c. seven to 12

d. 10 to 15

Learning Objective: 13.4: Explain the role of venture capitalists and how they finance entrepreneurs.

Cognitive Domain: Knowledge

Answer Location: How Venture Capital Works

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

50. The average partner in a VC firm will do ______ deals per year.

a. 100

b. roughly 50

c. five to 10

d. one to three

Learning Objective: 13.4: Explain the role of venture capitalists and how they finance entrepreneurs.

Cognitive Domain: Knowledge

Answer Location: Why VCs Might Say No

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

51. An entrepreneur has conducted crowdfunding to raise enough money for patents and building the founding team. He is now looking for funds to form a prototype and pitch the product to new investors. Which of the following is the most likely source of funds?

a. angel investor

b. venture capitalist

c. family and friends

d. venture capitalist groups

Learning Objective: 13.1: Define equity financing for entrepreneurs and outline its main stages.

Cognitive Domain: Comprehension

Answer Location: Forms of Equity Financing

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

52. IPOs, mergers and acquisitions, and buybacks are all types of ______ strategies.

a. investment

b. exit

c. growth

d. retrenchment

Learning Objective: 13.5: Describe how investors carry out due diligence processes.

Cognitive Domain: Comprehension

Answer Location: Exits/Harvesting

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

53. Karen has formulated a line of green cleaning products, which she has tested with local commercial entities with great results. She is now ready to seek money to place the product in stores. What stage of financing is Karen interested in?

a. seed-stage financing

b. startup financing

c. early-stage financing

d. continuity financing

Learning Objective: 13.1: Define equity financing for entrepreneurs and outline its main stages.

Cognitive Domain: Application

Answer Location: Stages of Equity Financing

Difficulty Level: Medium

AACSB Standard: Application of knowledge

54. How far back can we track the history of venture capital?

a. to the dot com investments of the early 90s

b. to venture capital startups in the 1980s

c. to the 1958 Small Business Investment Act

d. to early 20th-century investors such as the Rockefellers and the Bessemers

Learning Objective: 13.4: Explain the role of venture capitalists and how they finance entrepreneurs.

Cognitive Domain: Knowledge

Answer Location: A Brief History of Venture Capital

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

55. If a VC offers you $2 million for a third of your company, what was your pre-money valuation?

a. ~$2 million

b. ~$3 million

c. ~$4 million

d. ~$6 million

Learning Objective: 13.2: Illustrate the basics of business valuation.

Cognitive Domain: Application

Answer Location: How Do Investors Value Startups?

Difficulty Level: Easy

AACSB Standard: Application of knowledge

56. What practice allows larger companies to purchase smaller companies to increase profitability or eliminate competition?

a. acquisitions

b. LLCs

c. IPOs

d. buybacks

Learning Objective: 13.5: Describe how investors carry out due diligence processes.

Cognitive Domain: Knowledge

Answer Location: Exits/Harvesting

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

57. What exit strategy allows the entrepreneur an opportunity to purchase back venture capital stock at cost and an additional premium?

a. IPO

b. exit clause

c. buyback

d. retract clause

Learning Objective: 13.5: Describe how investors carry out due diligence processes.

Cognitive Domain: Knowledge

Answer Location: Exits/Harvesting

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

58. A study of 212 U.S. startups form the late 1990s and early 2000s showed that what percentage of the founders were no longer CEO after three years?

a. 50%

b. 80%

c. 20%

d. 12%

Learning Objective: 13.5: Describe how investors carry out due diligence processes.

Cognitive Domain: Knowledge

Answer Location: Rich or King/Queen? The Trade-Off Entrepreneurs Make

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

True/False

1. In early-stage financing, small amounts are given so that entrepreneurs can prove a business concept.

Learning Objective: 13.1: Define equity financing for entrepreneurs and outline its main stages.

Cognitive Domain: Knowledge

Answer Location: Stages of Equity Financing

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

2. Seed-stage financing consists of small amounts of capital to help entrepreneurs prove a concept.

Learning Objective: 13.1: Define equity financing for entrepreneurs and outline its main stages.

Cognitive Domain: Knowledge

Answer Location: Stages of Equity Financing

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

3. Entrepreneurs should not conduct due diligence on potential venture capital investors.

Learning Objective: 13.5: Describe how investors carry out due diligence processes.

Cognitive Domain: Comprehension

Answer Location: 13.5. Due Diligence

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

4. An angel investor is frequently a family member or close friend.

Learning Objective: 13.1: Define equity financing for entrepreneurs and outline its main stages.

Cognitive Domain: Knowledge

Answer Location: Forms of Equity Financing

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

5. The cofounders’ experience and previous successes will influence an investor’s willingness to invest in a company.

Learning Objective: 13.2: Illustrate the basics of business valuation.

Cognitive Domain: Comprehension

Answer Location: How Do Investors Value Startups?

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

6. If an entrepreneur issues convertible debt, he or she will lose control of the company.

Learning Objective: 13.2: Illustrate the basics of business valuation.

Cognitive Domain: Comprehension

Answer Location: Convertible Debt

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

7. Angel investors are eligible to invest as long as they are accredited investors.

Learning Objective: 13.3: Describe angel investors and how they finance entrepreneurs.

Cognitive Domain: Knowledge

Answer Location: 13.3. Angel Investors

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

8. Generally speaking, there are more minority angel funding groups in the United States than women angel groups.

Learning Objective: 13.3: Describe angel investors and how they finance entrepreneurs.

Cognitive Domain: Knowledge

Answer Location: Angel Groups

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

9. Because they are investors, angel investors and venture capitalists do not usually have an exit plan.

Learning Objective: 13.5: Describe how investors carry out due diligence processes.

Cognitive Domain: Comprehension

Answer Location: Exits/Harvesting

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

10. When working with a venture capitalist, it is possible to be demoted within your own company.

Learning Objective: 13.5: Describe how investors carry out due diligence processes.

Cognitive Domain: Comprehension

Answer Location: Rich or King/Queen? The Trade-off Entrepreneurs Make

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

11. The authors recommend finding investors early in the game so that you can focus on building the company.

Learning Objective: 13.1: Define equity financing for entrepreneurs and outline its main stages.

Cognitive Domain: Comprehension

Answer Location: 13.1. What Is Equity Financing?

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

12. Typically, entrepreneurs value their companies based on its current financial performance.

Learning Objective: 13.2: Illustrate the basics of business valuation.

Cognitive Domain: Comprehension

Answer Location: How Can Entrepreneurs Value Their Companies?

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

13. By issuing convertible debt, the entrepreneur will become the minority stockholder and lenders will assume control over how the company is run.

Learning Objective: 13.2: Illustrate the basics of business valuation.

Cognitive Domain: Knowledge

Answer Location: Benefits and advantages

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

14. Research suggests that women are better investors than men, as they take more time researching potential entrepreneurial ventures, and take on less risk.

Learning Objective: 13.3: Describe angel investors and how they finance entrepreneurs.

Cognitive Domain: Knowledge

Answer Location: Angel Groups

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

15. Generally, if a venture is at an early stage, then venture capital is the most likely source of funding.

Learning Objective: 13.3: Describe angel investors and how they finance entrepreneurs.

Cognitive Domain: Knowledge

Answer Location: Angel Groups

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

16. Angel investors usually look for opportunities in young startups that can be expected to return 10 times their investment in five years.

Learning Objective: 13.3: Describe angel investors and how they finance entrepreneurs.

Cognitive Domain: Knowledge

Answer Location: 13.3. Angel Investors

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

17. Very few founding CEOs are pushed out after giving up equity to VCs.

Learning Objective: 13.5: Describe how investors carry out due diligence processes.

Cognitive Domain: Knowledge

Answer Location: Rich or King/Queen? The Trade-off Entrepreneurs Make

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

18. An entrepreneur should keep 90% of the equity until the financing has been worked out.

Learning Objective: 13.1: Define equity financing for entrepreneurs and outline its main stages.

Cognitive Domain: Comprehension

Answer Location: Splitting the Ownership Pie

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

19. Entrepreneurs can seek advice from lawyers and accountants to help determine the market rates for companies like theirs.

Learning Objective: 13.2: Illustrate the basics of business valuation.

Cognitive Domain: Knowledge

Answer Location: How can Entrepreneurs Value Their Companies

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

20. Venture capital became more organized and professional with the 1946 creation of American Research and Development.

Learning Objective: 13.4: Explain the role of venture capitalists and how they finance entrepreneurs.

Cognitive Domain: Knowledge

Answer Location: A Brief History of Venture Capital

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

21. Angel investors and venture capitalists are mostly professional money managers.

Learning Objective: 13.4: Explain the role of venture capitalists and how they finance entrepreneurs.

Cognitive Domain: Knowledge

Answer Location: A Brief History of Venture Capital

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

22. There is a reliable formula to determine how much equity you should keep and how much you should give away.

Learning Objective: 13.1: Define equity financing for entrepreneurs and outline its main stages.

Cognitive Domain: Knowledge

Answer Location: Splitting the Ownership Pie

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

23. Entrepreneur Mike Moyer suggests creating a process for allocating equity based on the contributions made, including things like time, money, and intellectual property.

Learning Objective: 13.1: Define equity financing for entrepreneurs and outline its main stages.

Cognitive Domain: Knowledge

Answer Location: Splitting the Ownership Pie

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

24. Early-stage financing involves larger funds than seed-stage financing.

Learning Objective: 13.1: Define equity financing for entrepreneurs and outline its main stages.

Cognitive Domain: Comprehension

Answer Location: Stages of Equity Financing

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

25. As a business grows and starts to take in more revenue, entrepreneurs may seek investment through the mezzanine stage of financing.

Learning Objective: 13.1: Define equity financing for entrepreneurs and outline its main stages.

Cognitive Domain: Comprehension

Answer Location: Stages of Equity Financing

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

Essay

1. You and your cofounders have spent a year building and testing a home wireless system that is easy to install and will integrate media streaming from phones, television, and the Internet. You have tested the product on family and friends and built a prototype. You now need money to build a pilot test, creating 100 systems and placing them in a display at five selected stores. Identify the best source(s) of capital that you and your cofounders should seek (you will need $100,000).

Learning Objective: 13.1: Define equity financing for entrepreneurs and outline its main stages.

Cognitive Domain: Application

Answer Location: Forms of Equity Financing

Difficulty Level: Medium

AACSB Standard: Application of knowledge

2. Imagine that you are about to go on Shark Tank to obtain financial backing. Describe what factors you should consider when valuing your company.

Learning Objective: 13.2: Illustrate the basics of business valuation.

Cognitive Domain: Comprehension

Answer Location: How Do Investors Value Startups?

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

3. Assume that you are an entrepreneur faced with giving up 20% of your company in exchange for venture capital. What factors would you consider in accepting this offer?

Learning Objective: 13.2: Illustrate the basics of business valuation.

Cognitive Domain: Comprehension

Answer Location: How Do Investors Value Startups?

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

4. Imagine that you have a new, tested invention that will require a million dollars in order to produce enough of the product to return a profit. What considerations should you review before approaching a venture capitalist?

Learning Objective: 13.4: Explain the role of venture capitalists and how they finance entrepreneurs.

Cognitive Domain: Application

Answer Location: 13.4. Venture Capitalists

Difficulty Level: Hard

AACSB Standard: Application of knowledge

5. Describe what might occur during the legal aspect of due diligence, prior to the actual investment.

Learning Objective: 13.5: Describe how investors carry out due diligence processes.

Cognitive Domain: Comprehension

Answer Location: 13.5. Due Diligence

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

6. Describe what might occur during the market analysis component of due diligence, prior to the actual investment.

Learning Objective: 13.5: Describe how investors carry out due diligence processes.

Cognitive Domain: Comprehension

Answer Location: 13.5. Due Diligence

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

7. What people might be interviewed in the course of due diligence?

Learning Objective: 13.5: Describe how investors carry out due diligence processes.

Cognitive Domain: Comprehension

Answer Location: 13.5. Due Diligence

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

8. Describe what you should look for during your assessment of a venture capitalist.

Learning Objective: 13.5: Describe how investors carry out due diligence processes.

Cognitive Domain: Comprehension

Answer Location: 13.5. Due Diligence

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

9. Consider that you have just been offered a million dollars to grow your business. However, the venture capitalist group will be stepping in as the management team, and you will retain 16% of the company. What should you consider in making your decision?

Learning Objective: 13.5: Describe how investors carry out due diligence processes.

Cognitive Domain: Analysis

Answer Location: Rich or King/Queen? The Trade-off Entrepreneurs Make

Difficulty Level: Medium

AACSB Standard: Analytical thinking

10. Describe the three typical exit strategies available during the due diligence process. What companies are likely to use each?

Learning Objective: 13.5: Describe how investors carry out due diligence processes.

Cognitive Domain: Application

Answer Location: 13.5. Due Diligence

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets