chapter 23 (1)

Question 2

Agnel investors

Answer 2

people who will provide the initial capital to start their business.

Question 3

Angel group

Answer 3

Group of angel investors who pool their money and decide as a group which investment to fund

Question 4

venture capital firm

Answer 4

A limited partnership that specializes in raising money to invest in the private equity of young firms

Question 5

Venture capitalists

Answer 5

The general partners that run the venture capital firm

Question 6

private equity firm

Answer 6

Organized very much like a venture capital firm, but it invests in the equity of existing privately held firms rather than start-up companies.

Question 7

Leverage buyout (LBO)

Answer 7

Often private equity firms initiate their investment by finding a publicly traded firm and purchasing the outstanding equity, thereyb taking the company private in a transaction called a leverage buyout

Question 8

corporate investors

Answer 8

many established corporations purchase equity in younger private companies. A corporation that invests in private copanies is called many different names, including corporate investor, corporate partner, strategic parter and strategic investor

Question 9

preferred stock

Answer 9

issued by mature companies usually has preferential dividend, liquidation or voting rights relative to common shareholders

Question 10

convertible preferred stock

Answer 10

while the preferred stock issued by young companies typically does not pay regular cash dividends, it usually gives the owner the option to convert it into common stock, and so is called convertible preferred stock

Question 11

funding round

Answer 11

each time the firm raises money. Each round will have its own set of securities with special terms and provisions.

Question 12

pre money valuation

Answer 12

The value of the prior shares outstanding at the price in the funding round

Question 13

Post money valuation

Answer 13

The value of the whole firm at the funding round price

Question 14

Post money valuation formula

Answer 14

Pre money valluation + amount invested

Question 15

Percentage ownership formula

Answer 15

Amount invested/post-money aluation

Question 16

liquidation preference

Answer 16

The liquidation preference specifies a minimum amount that must be paid to these security holders before any payment to common stockholders – in the event of a liquidation, sale, or mergere of the company. Typically between 1 and 3

Question 17

Seniority

Answer 17

it is not uncommon for investors in later rounds to demand seniority over investors in earlier rounds, to ensure that they are repaid first. When later round investors accept securities with equal priority, they are said to be pari passu

Question 18

participation rights

Answer 18

Holders of convertible shares without participation rights must choose between demanding their liquidation preference or converting their shares to common stock and forfeiting their liquidation preference and other rights

Question 19

Anti-dilution protection

Answer 19

if things are not goin gwell and the firm raises new funding at a lower price than in a prior round, it is referred to as a down round. ANti dilution protection lowers the price at which investors in earlier rounds can convert their shares to common, effectively increasing their ownership percentage in a down round at the expense of founders and employees

Question 20

BOard membership

Answer 20

new investors may also negotiate the right to appoint one or more members to the board of directors of the firm as a way of securing control rights

Question 21

exit strategy

Answer 21

how will investors eventually realize their returns from investing.

Question 22

two exit strategies

Answer 22

Through an acquisition or through a public offering. Often large corporations purchase successful start-up companies. In such a case, the acquiring company purchases the outstanding stock of the private company, allowing all investors to cash out