Question 1

Which of the following is NOT a reason why an investor would choose to invest in new and growing firms as a limited partner in a venture capital firm rather than making those investments directly by themselves?

Accepted Answer

The investor will not have a direct say in how the companies that the venture capital firm funds will be run, as the decision-making power lies with the general partners of the venture capital firm. The other options are all valid reasons why an investor may choose to invest in new and growing firms as a limited partner in a venture capital firm rather than making those investments directly themselves.

Question 2

Simone founded her company using $150,000 of her own money,issuing herself 300,000 shares of stock.An angel investor bought an additional 200,000 shares for $100,000.She now sells another 500,000 shares of stock to a venture capitalist for $2 million.What percentage of the firm does Simone now own?

Accepted Answer

Simone initially owned 300,000 shares. After all transactions, the total number of shares is 1,000,000 (300,000 + 200,000 + 500,000). Simone's ownership percentage is (300,000 / 1,000,000) * 100% = 30%.

Question 3

A large publishing firm specializing in college textbooks wishes to expand into online delivery of its materials.In order to facilitate this,it invests in a number of small start-up companies that deliver college courses online and uses these companies to start diversifying the delivery of its content.Which of the following best describes the role of the publishing firm as described above?

Accepted Answer

The publishing firm is investing in small start-up companies with the intention of diversifying its delivery of content. This makes the firm a corporate investor, as it is using its resources to invest in and acquire other companies to expand its business.

Question 4

Which of the following is LEAST likely to be a possible source of funds to finance a growing business?

Accepted Answer

Family investors are typically less likely to have the substantial funds needed to finance a growing business compared to angel investors, venture capital firms, and institutional investors, who usually have more resources and specialize in such investments.

Question 5

Jeremy founded a company.He issues 200,000 shares of series A stock for his own $100,000 investment.He then goes through three further rounds of investment,as shown below: 
Which of the following is closest to the percentage of the company owned by the Series D investors?

Accepted Answer

The answer of Jeremy founded a company.He issues 200,000 shares...

Question 6

When a company founder sells stock to outside investors in order to raise capital,the share of the company owned by the founder and the founder's control over the company will be reduced.

Accepted Answer

When a founder sells stock to outside investors, the ownership and control of the company will be diluted as the new investors will own a portion of the company.

Question 7

A firm's founder sells equity to outside investors for the first time in the form of preferred stock.In what way is this preferred stock most likely to differ from the preferred stock issued by an established public firm?

Accepted Answer

As a first-time issuer of preferred stock, the firm may be more concerned with retaining earnings for growth rather than paying cash dividends to investors. Therefore, the preferred stock is more likely to be non-dividend-paying. The other options are not necessarily true for all preferred stock issued by a new or established firm.

Question 8

Equity investors in a private company usually plan to realize a return on their investment by selling their stock when that company is acquired by another firm or sold to the public in a public offering.

Accepted Answer

Equity investors typically seek to realize a return on their investment through a liquidity event, such as a sale of the company to another firm or an initial public offering (IPO). Selling their stock in such an event is one way for equity investors to achieve a return on their investment.

Question 9

The Ontario Teacher's Pension Plan is a pension fund for public school teachers in the province of Ontario.It has a large and diverse portfolio of investments,both in Canada and internationally,and had net assets in December 2007 of C$108.5 billion.Which of the following best describes the Ontario Teacher's Pension Plan?

Accepted Answer

The Ontario Teacher's Pension Plan is a large pension fund that would be considered an institutional investor. It invests on behalf of its members, who are public school teachers, and has a diverse portfolio of investments. It is not an angel investor, venture capitalist, or family investor as those are different types of investors with different investment strategies and structures.

Question 10

Jeremy founded a company.He issues 200,000 shares of series A stock for his own $100,000 investment.He then goes through three further rounds of investment,as shown below: 
What is the post-money valuation for the series-D funding round?

Accepted Answer

The answer of Jeremy founded a company.He issues 200,000 shares...

Question 11

Which of the following statements is NOT true regarding venture capitalists?

Accepted Answer

The answer of Which of the following statements is NOT...

Question 12

The founder of a company issues 100,000 shares of series A stock for his own $250,000 investment.He then goes through three further rounds of investment,as shown below: 
What is the post-money valuation for the series-D funding round?

Accepted Answer

To calculate the post-money valuation for the series-D funding round, we need to first calculate the pre-money valuation for the round. 
The pre-money valuation for series-C is $1.16 million (given). 
The series-D round is raising $1 million for 12.5% of the company, so its post-money valuation can be calculated as:
Post-money valuation = Pre-money valuation + Investment 
Investment = $1 million / 12.5% = $8 million 
Post-money valuation = $1.16 million + $8 million = $9.16 million 
Therefore, the post-money valuation for series-D funding round is $2.24 million.

Question 13

Which of the following best describes a limited partnership that specializes in raising money to invest in the private equity of young firms?

Accepted Answer

A limited partnership that specializes in raising money to invest in the private equity of young firms is typically known as a venture capital firm. Institutional investors refer to organizations that manage large sums of money on behalf of others, such as pension funds or endowments. Corporate investors are companies that invest in other companies, and family investors are individuals or families that invest their personal funds into businesses.

Question 14

An entrepreneur founded his company using $200,000 of his own money,issuing himself 200,000 shares of stock.An angel investor bought an additional 100,000 shares for $200,000.The entrepreneur now sells another 400,000 shares of stock to a venture capitalist for $1 million.What is the post-money valuation of the company?

Accepted Answer

The post-money valuation is the total value of the company after the latest round of funding. In this case, the entrepreneur initially invested $200,000 for 200,000 shares, giving the company a pre-money valuation of $200,000. The angel investor then invested $200,000 for 100,000 shares, giving the company a post-money valuation of $400,000. The entrepreneur then sold 400,000 shares to the venture capitalist for $1 million, giving the company a post-money valuation of $1,750,000.

Question 15

Simone founded her company using $150,000 of her own money,issuing herself 300,000 shares of stock.An angel investor bought an additional 200,000 shares for $100,000.She now sells another 500,000 shares of stock to a venture capitalist for $2 million.What is the post-money valuation of the company?

Accepted Answer

The pre-money valuation of the company can be calculated by adding the founder's investment and the angel investor's investment:
Pre-money valuation = $150,000 + $100,000 = $250,000

The post-money valuation can be calculated by adding the pre-money valuation to the venture capitalist's investment:
Post-money valuation = Pre-money valuation + Venture capitalist's investment
Post-money valuation = $250,000 + $2,000,000 = $2,250,000

Therefore, the correct answer is B) $2,250,000.

Question 16

The founder of a company issues 100,000 shares of stock of series A stock for his own $250,000 investment.He then goes through three further rounds of investment,as shown below:
Which of the following is closest to the percentage of the company owned by the founder of the company?

Accepted Answer

The answer of The founder of a company issues 100,000...

Question 17

Which of the following statements is NOT true regarding angel investors?

Accepted Answer

Angel investors are not typically arranged as limited partnerships. They can invest individually, as part of a group, or through a network. Limited partnerships are a more common structure for venture capital firms.

Question 18

Why do most people launching a start-up company acquire their funds through the venture capital industry rather than through angel investors?

Accepted Answer

Angel investors are typically individuals with substantial capital who invest in early-stage companies, often before these companies are attractive to venture capitalists. Many entrepreneurs may not have direct access to such individuals, making venture capital a more accessible option for funding.

Question 19

Which of the following is NOT a common name for a corporation that invests in private companies?

Accepted Answer

"Venture partner" is typically used to describe an individual or role within a venture capital firm, rather than a corporation that invests in private companies. Strategic investor, corporate partner, and strategic partner are terms that can describe corporations investing in private entities.

Question 20

Nature's Bounty,an organic seed company,is seeking to grow from a small company selling seeds in local markets into a company that sells seeds across several states.The funding for this expansion comes from a wealthy individual who uses his considerable inherited wealth to fund a variety of eco-friendly businesses.Which of the following best describes this individual's relationship with Nature's Bounty?

Accepted Answer

An angel investor is typically an individual who provides funding for startups or small businesses in exchange for ownership equity or convertible debt. In this scenario, the individual is providing funding for Nature's Bounty, a small organic seed company, to expand from selling seeds in local markets to selling seeds across several states. The fact that this individual uses his inherited wealth to fund eco-friendly businesses suggests that he is an angel investor who is interested in supporting socially and environmentally responsible companies. A venture capitalist typically invests in more established companies with a proven track record of growth, while institutional investors and corporate investors are typically organizations rather than individuals.

Quiz 14: Raising Equity Capital