Test Bank Answers Ch.9 Equity Financing For High Growth 6e

Chapter 9 – Equity Financing for High Growth

True / False

1. Angels are low‐net‐worth individuals who have some funds that they are willing to risk in start‐up companies.
2. The best angels are those that can bring contacts, experience, and long-term financing.
3. One of disadvantages to strategic partnerships and corporate investments is that they may actually reduce the chance of receiving venture capital funds.
4. Do not take cash from external shareholders unless you intend to build the company for sale.
5. Outside shareholders’ primary objective is to help the entrepreneur gain market share.
6. The most common way that investors can participate in a liquidity event and exit strategy is for the venture to be sold to a larger enterprise.
7. Public stock and private equity are the two basic classes of ownership in companies.
8. One way that a privately held company can acquire funds for its operations and growth is to sell an ownership position of the company to willing investors.
9. “Anti-dilution” refers to the issuances of stock to outside investors which results in a loss of a percentage of ownership.
10. Raising very small amounts of money in dribs and drabs can be a tremendous drain the founder’s time, leaving little time to actually build the company.
11. It is important to understand that with a VC firm, all interests are focused to maximize the return on investment; there is no other agenda.
12. Right of first refusal refers to the investor’s right to change the management team if certain conditions are not met.
13. Venture capital firms are a group of professional managers who manage high-risk private equity investments for investors who wish to participate in this sector of the investment market.
14. Corporate loans are typically secured by a company’s assets.
15. Bank loans typically take a period of one week to one month to secure.
16. In recent years, the venture capital industry has been expanding in the United States, principally due to the lingering result of the dot.com bubble in 2000.
17. Entrepreneurs usually have an inflated view of what the company is worth in the first round of investment and may have to accept a valuation well below their expectations.
18. Some venture capital firms specialize in very early-stage funding, but this is the exception rather than the rule.

Short Answer / Fill in the Blank

1. ________________are typically less demanding than venture capital and other institutional professional investors.
2. ________________ means selling part of the ownership of the company to investors through shares of stock.
3. Investors can only derive the benefit of their investment when a ______________ event occurs and an “exit strategy” is fulfilled.
4. There are two basic classes of ownership in companies: shares of stock in publicly traded companies and ________________ equity, in which the founders either own common stock, or participate as members in a partnership or in an LLC.
5. _______________ refers to the investigative process that prospective investors undertake prior to making an investment.
6. ______________ financing refers to additional funds to carry a company during the period between identifying the needs for additional funds and actually receiving money from the bank.
7. ____________________ partnerships that include an equity investment usually occur when ventures find that they are rejected from traditional financing methods or are unwilling to accept the equity valuations assigned by potential investors.
8. ________ investors invest their own money.
9. Angels are always looking for new deal opportunities, called __________.
10. The average number of members in an angel group is ____________.

29. The __________valuation is the value that the entrepreneur and the investor agree the company is worth prior to any investment.

30. ______________is the company’s valuation immediately after the investment is made.

31. The entrepreneur should undertake ­­­­­­­­­­______________ on the potential investor(s) to make sure that the deal is a good fit to their investment criteria and that the investors have deep knowledge in the business area.

32. The terms, conditions and agreements negotiated by investors that provide certain advantages over common shareholders are termed: _______________ and ____________________.

33. __________________ refer rights to purchase a certain number of shares, common or preferred as defined, within a given time period and at a stated price.

Multiple Choice

1. Angels are:
2. Individuals who rarely invest.
3. High-net-worth individuals that never risk their wealth.
4. High-net-worth individuals who are willing to risk their funds in start-up companies.
5. Low-net-worth individuals that risk everything on investments.

35. Rounds of equity financing can be termed:

a. A-Z rounds.

b. Pre-seed and Seed.

c. Orchestra and Mezzanine.

d. Anti-syndicating and Syndicating.

36. Factors to consider when raising funds include all of the following except:

a. The loss of control which can occur with outside funding.

b. The time and energy needed to raise funds.

c. Raising enough money in the first round.

d. Acceptance of a too high valuation of the company by an investor.

37. Which statement is true of classes of corporate stock?

a. In the event of bankruptcy, preferred stockholders receive their investment back first before the common shareholders and debtholders.

b. Convertible preferred stock refers to an investment that initially is made in stock and that can be changed to a loan at a later time.

c. A professional investor typically will require that an LLC or partnership be converted into a full corporation with the founders and employees owning common shares.

d. Both a and c are true of corporate stock.

38. In the first phase of due diligence, investors perform a quick evaluation on key claims made by the entrepreneur. This includes:

• 1. Background checks on the principals.
  2. Verifying title/ownership of any intellectual property.
  3. Analyzing potential competitors.
  4. All of the above.

39. Which is true of the due diligence process?

1. The entrepreneur should investigate the future investors to ensure the investment is a good fit to their investment criteria.
2. The entrepreneur discloses only the most basic information to the investor for privacy reasons.
3. The investor will make only a quick investigation of the company because of time constraints.
4. None of the above are true regarding due diligence.

40. When valuing a business,

• 1. Post-money valuation is the value that the entrepreneur and the investor agree upon as to how much the company is worth before any investment.

b. Valuation at the initial phase of a company’s life is easier because the sales and cash flows are more certain than in later rounds of funding.

c. At the later stages of a company’s growth, the major factor that determines the value of the business is cash flow and generation of profits in the marketplace.

d. Valuations are based solely on financial calculations such as internal rate of return and present value concepts.

1. When asking how much more is a preferred share worth than a common share, the answer depends upon which of the following?

a. The health of the company- preferred shares are worth much more than common shares if the company is very healthy.

• 1. The stage of the company – preferred shares are worth much more than common shares at early stages of the company’s life.
  2. Neither of the above are considerations.
  3. Both of the above are considerations.

1. Typical preferences and covenants negotiated by investors include:
   1. Registration rights
   2. Right of first refusal
   3. Both a and b
   4. Neither a or b
2. Advantages of strategic partnerships and corporate investments include:
   1. The objectives of the strategic partner and entrepreneur may differ.
   2. Corporations are usually slow in making decisions.
   3. Corporate management often changes over time.
   4. None of these are advantages of strategic partnerships and corporate investments.

Ans. D Page: 231

1. When selecting a venture capitalist (VC), an entrepreneur should do all of the following except:
   1. Keep a high profit so the VCs will visit.
   2. Thoroughly trim all levels of management to reduce costs.
   3. Target the search to look for VC firms that specialize in the industry and size of investment.
   4. Look for smaller VC firms that may be more flexible and more receptive to investing in the company.
2. All of the following are techniques used to value a company except:
   1. Earnings and asset valuation.
   2. Adjusted book value.
   3. Discounted cash flow.
   4. All of the above are acceptable techniques.

46. All of the following may influence a venture capital firm’s funding decision except:

a. Fee to apply.

b. Location of the venture.

c. Stage of the fund.

d. State of development.

47. All of the following are true about venture capital firms except:

• 1. They specialize in certain industries and certain locations.
  2. They can be valuable assets to the company in terms of their contacts, market expertise and business strategy.
  3. They should be in close alignment with the entrepreneur’s objectives to increase chances of venture’s success.
  4. They typically fund early-stage vs. later stage ventures.

48. Which of the following factors would likely NOT influence a venture capital firm’s funding decisions?

1. Specialized industries for the venture
2. Location of the venture
3. Stage of fund and stage of development
4. If the entrepreneur changed directions from their original business plan after learning about their environment and opportunities.

49. A method to secure capital or debt financing, when the entrepreneur is rejected from traditional financing methods or is unwilling to accept the equity valuations assigned by potential investors is to structure a:

a. Bank loan.

b. Strategic partnership that may include an equity investment.

c. Credit cards.

d. Factoring.

50. To select a venture capitalist, all but which one of the following is suggested?

• 1. Target the search.
  2. Investigate possible venture partners.
  3. Keep a low profile so the VC’s will visit.
  4. Beef up management.

51.________________ are estimates of values that might be attained in a strategic acquisition are usually calculated on the basis of comparison with other purchases that have taken place recently in the same industry sector.

1. Valuation models.
2. Comps.
3. Milestone methods.
4. Positions.
5. By looking at forecasted earnings (profits) and multiplying those earnings by a factor that is relevant to the industry, a value can be computed called _______.
   1. Strategic sale.
   2. Cash flow estimates.
   3. Strategic acquisition.
   4. Perceived market price.