Deck 16: Sources of Equity Financing

Question 1

A(n)________ is a private,for-profit organization that purchases equity positions in young businesses that will potentially produce returns of 300 to 500 percent over five to seven years.

A)commercial bank
B)venture capital company
C)"angel"
D)SB-1 filing

Answer 1

B

Question 2

Unlike entrepreneurs of the past,today's entrepreneurs:

A)are finding more government interest and funding for business start-ups than ever before.
B)find fewer closed doors as small business start-ups have become less risky.
C)have to piece their capital together from several sources.
D)are spending nearly 75% of their time raising capital.

Answer 2

C

Question 3

One important intangible yet highly important advantage an investment from a large corporate partner gives a start-up is:

A)credibility.
B)success.
C)power.
D)None of the above

Answer 3

A

Question 4

The largest single source of external equity capital for small businesses is:

A)angels.
B)venture capitalists.
C)Small Business Administration loans.
D)commercial bankers.

Question 5

________ is any form of wealth used to produce more wealth.

A)Debt
B)Equity
C)Capital
D)Capacity

Question 6

Private investors,or "angels," are often:

A)wealthy individuals.
B)entrepreneurs.
C)persons who invest in business startups in exchange for equity stakes in the companies.
D)All of the above

Question 7

The credit crunch has hit those entrepreneurs seeking between $100,000 and ________.

A)$3 million
B)$500,000
C)$1 million
D)$750,000

Question 8

________ capital is the pool of temporary funds of the business used to support the normal operation of the business on a short-term basis.

A)Growth
B)Fixed
C)Equity
D)Working

Question 9

A disadvantage of using friends and relatives as investors is:

A)they tend to demand more stock options.
B)familial seniority often conflicts with the "chain of command."
C)they require more leniency with benefits and pay.
D)unrealistic expectations or misunderstood risks destroy friendships or family relationships.

Question 10

The money Bert uses to build inventory for the upcoming Christmas season would be classified as ________ capital.

A)growth
B)working
C)fixed
D)efficiency

Question 11

Private "angel" investors tend to:

A)take 80% ownership by the time the company goes public.
B)provide seed money and less than $500,000.
C)look for returns of 60-75%.
D)only finance projects within their local area or region.

Question 12

"Angels":

A)are hard investors to please.Nearly 70% are dissatisfied with their investment.
B)tend to be easy to get money from as they accept nearly 60% of the opportunities presented.
C)have an average of $150,000 invested in 3.5 firms at any given time.
D)only finance deals requiring over $1 million in capital.

Question 13

When looking for an angel,the key is:

A)networking.
B)using the SBA as a contact point.
C)searching the web.
D)using business incubators' computer matching services.

Question 14

Most "angel" investments:

A)are for growth or fixed capital.
B)are for between $10,000 and $2,000,000.
C)come from international or foreign investors.
D)are seeking a high and quick return on their investment.

Question 15

When receiving investment money from friends and relatives entrepreneurs should:

A)use a clear verbal contract to ensure no misunderstandings.
B)only borrow from close friends and relatives who won't cause them trouble.
C)discuss all the details of the investment up front.
D)not borrow more than 30% of the necessary capital from them.

Question 16

Tien is looking for capital to purchase new buildings and equipment for her small manufacturing company.Tien is looking for ________ capital.

A)working
B)fixed
C)growth
D)asset-based

Question 17

The most common source of equity funds used to start a small business is:

A)private investors or "angels."
B)loans from commercial banks.
C)the entrepreneur's pool of personal savings.
D)public stock issues.

Question 18

When structuring a deal with an "angel," an entrepreneur should remember that:

A)"angels" tend to prefer a controlling interest in the business.
B)the deal needs an annual return of 60-75%.
C)"angel" money is patient,often waiting seven or more years to cash out.
D)they prefer to earn their returns through dividends and interest.

Question 19

An advantage of using friends and relatives as investors is that:

A)they tend to be more patient.
B)they take a lower return.
C)they don't want controlling interest in the company.
D)they don't tend to have unrealistic expectations.

Question 20

________ financing includes the personal investment of the owners and is often called "risk capital."

A)Equity
B)Asset-based
C)Debt
D)Growth

Question 21

The two factors that make a deal attractive to venture capitalists are:

A)effective marketing strategies and networking opportunities.
B)high returns and a convenient (and profitable)exit strategy.
C)high returns and networking opportunities.
D)a convenient and (profitable)exit strategy and effective marketing strategies.

Question 22

Most venture capitalists purchase ownership in a small business through:

A)a common stock or convertible preferred stock.
B)an ESOP.
C)loans with an option to buy stock.
D)a general partnership.

Question 23

Under a ________ agreement,the underwriter agrees to purchase all of the shares in a company's public offering and then resells them to investors.

A)best effort
B)lock-up
C)final price
D)firm commitment

Question 24

The document outlining the details of the agreement between the entrepreneur and the stock underwriter is called:

A)Regulation D.
B)a filing.
C)the letter of intent.
D)the registration statement.

Question 25

Venture capitalists look for all of the following except:

A)competent management.
B)industry stagnation.
C)viable exit strategy.
D)competitive edge.

Question 26

The first step in the IPO process is:

A)negotiating a letter of intent.
B)preparing the registration statement.
C)choosing the underwriter.
D)doing the road show.

Question 27

The purpose of the ________ is to promote interest among potential underwriters in the IPO.

A)road show
B)registration
C)best efforts agreement
D)filing Regulation A

Question 28

The single most important ingredient in making a successful public offering is:

A)choosing a capable underwriter.
B)negotiating a favorable letter of intent.
C)preparing a suitable registration statement.
D)filing Regulation D with the SEC.

Question 29

One of the biggest advantages of going public is:

A)the ability to attract low cost equity funding.
B)the ability to retain control while gaining maximum funding.
C)better employee morale and productivity.
D)enhanced credibility and improved corporate image.

Question 30

In an IPO,who signs the best efforts agreement?

A)Management
B)Angel
C)Underwriter
D)Board of directors

Question 31

A ________ outlines the details of the deal in an IPO.

A)roadshow
B)lock-up agreement
C)letter of intent
D)registration statement

Question 32

In a public offering,the underwriter:

A)advises the owner as to the best structure of the business going into the sale.
B)serves as an adviser and consultant to the small business in preparing the registration statement for the SEC.
C)is bound to the offering until it is executed.
D)is listed as one of the officers of the company.

Question 33

The "wait to go effective" is the time period when:

A)the SEC registration statement is being prepared.
B)the underwriter decides what regulation to file under.
C)the firm prices the stock for the offering.
D)the company is waiting for SEC approval after filing the registration statement.

Question 34

One of the things that underwriters look for in a company that wants to go public is:

A)presence in a mature industry.
B)filing fees with the SEC.
C)strong bankers.
D)a clear organizational structure.

Question 35

Probably the biggest disadvantage of "going public" to the entrepreneur is the:

A)dilution of ownership interest.
B)diminished corporate image.
C)future threat of being acquired through the use of stock.
D)loss of key employees.

Question 36

Venture capitalists look for ________ as the most important ingredient in the success of any business.

A)innovation
B)a growth industry
C)a competitive edge
D)competent management

Question 37

When filing with the SEC,the initial registration statement:

A)prohibits a "road show."
B)is filed without share price,proceeds,or commissions listed.
C)signals the time to sign the formal underwriting agreement.
D)is generally accepted without corrections by the SEC.

Question 38

A lock-up agreement:

A)prevents the sale of "insider" shares for a specific period of time-often 12 to 36 months-after an initial public offering (IPO).
B)prevents a small company from signing on with other underwriters to make an IPO.
C)prevents a company about to make an IPO from signing a union contract.
D)establishes the final price of the IPO so that it cannot fluctuate before the stock offering is actually made.

Question 39

A ________ agreement prevents the sale of insider shares for a specific time period.

A)lock-up
B)pre-nuptial
C)road show
D)registration

Question 40

When taking a company public,investment bankers look for:

A)a leading position in a stable market.
B)3 to 5 years of audited financial statements.
C)a strong record of revenues.
D)a moderate growth rate.

Question 41

Since 2001 there has been a ________ in the number of public offerings.

A)significant drop
B)significant increase
C)slight drop
D)slight increase

Question 42

Some suggestions for maintaining family relationships and friendships when borrowing for a business are:

A)keep the arrangement strictly family.
B)borrow as much as you can.
C)an oral contract is as good as a written contract.
D)treat the money as "bridge financing."

Question 43

In a(n)________,a company raises capital by selling shares of its stock to the general public for the first time.

A)angel offering
B)secondary offering
C)venture capital sale
D)IPO

Question 44

One of the reasons for the significant drop in the number of public offerings since 2001 is:

A)the dot-com crash of 2000.
B)the U.S.economic crisis.
C)the global economic meltdown.
D)lack of available float.

Question 45

________ is when a company raises capital by selling shares of its stock to the general public for the first time.

A)Preferred stock selling
B)Rule 157 Offerings
C)IPO
D)All of the above

Question 46

Working capital can be calculated by:

A)Current Asset - Current Liabilities.
B)Total Asset - Current Liabilities.
C)Total Liabilities - Total Asset.
D)Total Asset - Total Liabilities.

Question 47

Since 2001,the average IPO has raised ________ for the issuing company.

A)$310 million
B)$218 million
C)$478 million
D)$118 million

Question 48

One of the reasons for the significant drop in the number of public offerings since 2001 is:

A)the U.S.economic crisis.
B)the global economic meltdown.
C)the Quattrone Act,2002.
D)the Sarbanes-Oxley Act,2002.

Question 49

For an IPO,most investment bankers look for:

A)consistently high growth rates & strong record of earnings.
B)three to five years of audited financial statements & a solid position in rapidly growing markets.
C)a sound management team and a strong board of directors.
D)All of the above

Question 50

________ are typically wealthy individuals or entrepreneurs themselves.

A)Venture capitalists
B)Seed funders
C)Venture funders
D)Angels

Question 51

Choosing the right source of capital is as important as choosing the right form of ownership for the small business owner.

Question 52

The angel market is:

A)fragmented.
B)concentrated.
C)formalized.
D)centralized.

Question 53

These ________ are wealthy individuals,often entrepreneurs themselves,who invest in business start-ups in exchange for equity stakes in the companies.

A)venture capitalists
B)rich family members
C)angels
D)public investors

Question 54

________ is a key criteria that most venture capitalists look for.

A)Intangible factor
B)High working capital
C)Fair ROI
D)None of the above

Question 55

Typically,________ is needed to purchase the business's permanent or fixed assets.

A)working capital
B)growth capital
C)fixed capital
D)None of the above

Question 56

________ are private,for-profit organizations that purchase equity positions in young businesses they believe have high-growth and high-profit potential,producing annual returns of 300 to 500 percent over five to seven years.

A)Angel investors
B)Venture capital companies
C)Government bonding investors
D)Corporate venture investors

Question 57

Angels fill a significant gap in the ________ capital market.

A)working
B)fixed
C)seed
D)later stage

Question 58

Most venture capitalists look for:

A)competent management.
B)competitive edge.
C)companies in growth industries.
D)All of the above

Question 59

Equity capital is also called:

A)equity money.
B)stock money.
C)risk capital.
D)None of the above

Question 60

A highly possible source of funding for a start-up and early business is:

A)venture capital and private placement.
B)personal savings and retained earnings.
C)personal savings and partners.
D)IPO and Regulation A.

Question 61

Layered financing is the process of piecing start-up capital together from a variety of sources rather than relying on a single source of funds.

Question 62

Seed capital for the entrepreneur is risk capital for investors.

Question 63

The problem with the lack of funding for start-ups is that the seed capital and funding sources just aren't there.

Question 64

If an entrepreneur is not willing to risk funds in a business venture,other potential investors and lenders are not likely to provide capital either.

Question 65

Private investors,or "angels," seek 60-75% annual return-on-investment and tend to take a 51%+ share of the business.

Question 66

In exchange for the financing they receive from venture capitalists,entrepreneurs must give up a portion of their businesses,sometimes surrendering a majority interest and control of its operations.

Question 67

An entrepreneur should not take advantage of offers from family and friends to lend or invest money for the business venture.

Question 68

A small company needs fixed capital to expand and grow the business.

Question 69

"Angels" usually prefer to invest in businesses they know something about.

Question 70

"Angels" typically invest in businesses in the start-up phase,providing the seed capital needed to get the business going.

Question 71

"Angels" control a larger pool of venture capital than venture capitalists.

Question 72

Most venture capitalists make investments in promising business ventures in return for a share of the ownership.

Question 73

The owner of a small retail shoe store and the owner of a small furniture manufacturer would likely have very different capital requirements.

Question 74

The money needed to launch a new business is known as growth capital.

Question 75

Locating "angels" to finance a business is essentially a matter of networking-finding the right contacts.

Question 76

The primary advantage of equity capital is that it does not have to be repaid with interest.

Question 77

The need for growth capital is created by the uneven flow of cash into and out of the business due to normal seasonal fluctuations.

Question 78

The most common source of equity funds used to start a small business is an SBA loan.

Question 79

Lenders of fixed capital expect the assets purchased to increase the borrowing firm's efficiency,profitability,and cash flows.

Question 80

Entrepreneurs forgoing their paychecks during the start-up phase is known as sweat equity.