Venture Capital MCQs (Chapterwise Multiple Choice Questions)

Why does corporate structure matter when the investment is for equity?

Because equity can only be invested in when the company is structured as a corporation

Because, depending on the structure, the agreement has to be handled differently to be legally binding

Because there are better returns on investment if the company is a corporation as compared with a limited liability corporation

It ultimately doesn't matter as much as the amount invested matters.

Answer & Explanation

Correct Answer: Because, depending on the structure, the agreement has to be handled differently to be legally binding

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What is a Term Sheet?

It is a document which stipulates the term of the investment.

It is a document which the company receiving funding prepares, stating what their expected revenues for the upcoming years are.

It is another term for

It is a document which stipulates the venture capital firm's terms for the investment, such as the amount they will invest, the percentage of equity they require in exchange for the investment, and their expectations of the company they are investing in.

Answer & Explanation

Correct Answer: It is a document which stipulates the venture capital firm's terms for the investment, such as the amount they will invest, the percentage of equity they require in exchange for the investment, and their expectations of the company they are investing in.

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Which of the following would be considered an exit strategy?

Making a private company public via an initial public offering

Bringing in additional investors

Firing the management to bring in a more experienced management

Converting debt to shares

Answer & Explanation

Correct Answer: Making a private company public via an initial public offering

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Who ultimately decides to progress through the evaluation process?

An individual partner at the venture capital firm

A team from the venture capital firm working together

An advisory team outside of the venture capital firm

A lower level due diligence specialist

Answer & Explanation

Correct Answer: A team from the venture capital firm working together

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What is the attraction of convertible debt to a venture capitalist?

It allows them to gain more control over the firm.

It gives them the potential to hold debt or equity, depending on how the firm grows and what will be most profitable.

It allows them to liquidate more easily.

It limits any risk.

Answer & Explanation

Correct Answer: It gives them the potential to hold debt or equity, depending on how the firm grows and what will be most profitable.

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Why is the corporate structure important to the venture capital firm and part of the due diligence process?

Because venture capitalists want the easiest to form structure

Because corporate structure can have legal implications and depending on the business model of the target company, different corporate structures will be more applicable

Because accounting rules differ based on the structure of the company

Because it is easier to exit from an LLC than a C Corporation

Answer & Explanation

Correct Answer: Because corporate structure can have legal implications and depending on the business model of the target company, different corporate structures will be more applicable

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What is the term sheet used for once it is agreed upon and signed?

It is the legally documented agreement between the venture capitalist and the target company.

It is used as an outline for the legal team to draw up the official legal agreement between the venture capital firm and the target company.

It is a guideline for future operations.

It is similar to a business plan for the upcoming year.

Answer & Explanation

Correct Answer: It is used as an outline for the legal team to draw up the official legal agreement between the venture capital firm and the target company.

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What are the typical returns a venture capital firm expects when exiting from a successful investment?

At least 10 times their original investment

The market interest rate, compounded annually

Double their investment

Enough to break even and hold on to some equity

Answer & Explanation

Correct Answer: At least 10 times their original investment

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What role do the investors play in a venture capital firm?

That of investment screeners

That of managing directors

That of advisors

That of due diligence experts

Answer & Explanation

Correct Answer: That of advisors

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Why is an experienced management team critical for a new company?

It is difficult to navigate a new company towards success. A strong management team is likely to be more successful.

It brings in key stakeholders who won't leave early on.

It guarantees success.

Venture capitalists prefer to talk to people who talk the language rather than rookies.

Answer & Explanation

Correct Answer: It is difficult to navigate a new company towards success. A strong management team is likely to be more successful.

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Venture Capital Quick Quiz

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