Question 1

ESOP stands for Employee Share Ownership Plan.

Accepted Answer

ESOP stands for Employee Share Ownership Plan, which involves a plan in which a company provides its employees with an ownership stake in the company through the allocation of shares.

Question 2

If an entrepreneur has obtained a referral, he or she needs to get permission to use the name of the person making a referral when the investor is contacted.

Accepted Answer

It is important for the entrepreneur to ask the person making the referral for permission to use their name when contacting the investor. This helps establish credibility and trust with the investor.

Question 3

Most venture capital funds are organized as limited partnerships, in which the fund managers are the general partners and the investors are the limited partners.

Accepted Answer

Most venture capital funds are organized as limited partnerships, where the fund managers act as general partners and the investors as limited partners.

Question 4

While corporate venture capitalists are similar to traditional VCs in that they look for promising young companies on the verge of a spike in sales, corporations tend to be more risk-averse and specialized.

Accepted Answer

Corporate venture capitalists often have a narrower focus on industries or technologies related to their parent company's business, and may be more cautious in their investment decisions due to the potential impact on the overall company.

Question 5

The verification of facts, backgrounds, and reputations of key people, market estimates, technical capabilities of the product, proprietary rights, and the like is an investigation for investors called due diligence.

Accepted Answer

Due diligence is the process of thoroughly investigating a business or investment opportunity before making a decision. It includes verifying facts, backgrounds, and reputations of key people, market estimates, technical capabilities of the product, proprietary rights, and more. It is an important investigation for investors to ensure they are making informed decisions.

Question 6

Capital that is between senior debt financing and common shares is called mezzanine financing.

Accepted Answer

Mezzanine financing is a hybrid of debt and equity financing that typically sits between senior debt financing (secured debt) and common shares in terms of risk, return and priority for repayment in case of default.

Question 7

Subordinated debt often carries an equity "kicker" consisting of warrants or a conversion feature into common shares.

Accepted Answer

This statement is true. Subordinated debt may come with an equity kicker, which gives the lender the right to purchase stock at a specified price or convert the debt into equity. This feature provides investors with potential upside beyond the interest paid on the debt.

Question 8

A central idea with obtaining risk capital is that a smaller percentage of a larger pie is preferred to a larger percentage of a smaller pie.

Accepted Answer

This is because by obtaining risk capital, the entrepreneur is able to access a larger pool of funds which can be used to grow the business. In return for the funds, the investor takes a percentage of equity in the business. As the business grows, the absolute value of the equity that the entrepreneur has retained increases, despite the fact that their percentage of ownership may decrease. Therefore, a smaller percentage of a larger pie is preferred.

Question 9

Interest from a venture capitalist can be predicted by the amount needed and the required rate of return expected.

Accepted Answer

Venture capitalists typically evaluate investment opportunities based on the amount of funding needed and the potential rate of return on their investment. Higher funding needs and higher expected returns may increase the interest of a venture capitalist. However, there may be other factors that also influence their decision, such as the quality of the management team, market size, competition, and growth potential.

Question 10

Effective entrepreneurs set up meetings that allow them to present to more than one informal investor at the same time.

Accepted Answer

The answer of Effective entrepreneurs set up meetings that allow...

Question 11

Adding key team members, new customers or suppliers, or referring additional investment are basic ways to add value.

Accepted Answer

Adding key team members, new customers or suppliers, or referring additional investment can bring in new resources, expertise, and opportunities to a business, thereby adding value to it.

Question 12

Angels or wealthy individuals are often sought because they are more easily sold than formal investors (e.g., venture capitalists and private placements).

Accepted Answer

The answer of Angels or wealthy individuals are often sought...

Question 13

The most effective means of reaching informal investors is to consult online directories that have been developed for that purpose.

Accepted Answer

Online directories may not be the most effective means as informal investors often rely on personal networks and relationships rather than formal listings.

Question 14

Investment agreements with an informal investor will often include some form of a "put", whereby the investor has the right to require the venture to repurchase his or her shares after a specified number of years at a specified price.

Accepted Answer

This statement is true. A "put" is a common term used in investment agreements that allows the investor to require the venture to repurchase their shares at a certain price after a specified amount of time.

Question 15

It is best to be vague about other investors you are speaking with.

Accepted Answer

It is considered best practice to keep discussions about other potential investors confidential to avoid any potential conflicts of interest or competition.

Question 16

In the majority of the high-technology start-ups and early-stage companies, debt is normally secured to fund research and development, prototype development and product marketing, launch, and cover early losses.

Accepted Answer

In most high-technology start-ups and early-stage companies, equity financing rather than debt is used to fund research and development, prototype development, product marketing, launch, and early losses. This is because these companies are often pre-revenue and do not have the assets or track record to guarantee loans. However, there may be some cases where debt financing is used alongside equity financing.

Question 17

Whether or not the outcome of a presentation is continued investment interest, the entrepreneur needs to try to obtain the names of other potential investors from this meeting.

Accepted Answer

Even if the outcome of the presentation is not continued investment interest, the entrepreneur can still benefit by obtaining the names of other potential investors who may be interested in their business. Building a network of potential investors is important for future funding opportunities.

Question 18

There are only two classes of investors in new and young private companies: value-added investors and all the rest.

Accepted Answer

Value-added investors are those who bring not just capital but also expertise, networks, and other resources to help the company grow. All other investors are simply providing capital without any additional value beyond the money they invest.

Question 19

An equity investment requires that the executive team firmly believes that investors can and will add value to the venture.

Accepted Answer

Equity investors typically bring not only financial resources, but also experience, networks, and industry knowledge to a venture, so it is important for the executive team to believe that the investors can provide valuable support and guidance.

Question 20

If all you receive from an investor, especially a venture capitalist or a substantial private investor, is money, then you may not be getting a bargain.

Accepted Answer

A good investor should bring more than just money to the table. They should also provide valuable insights, connections, and resources to help the business succeed. If they only offer money, they may not be as invested in the success of the business and may not be the best partner for long-term growth.

Quiz 9: Ethical Decision Making and the Entrepreneur