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Basic Venture Capital MCQ

1. Which of the following is not an exit strategy?

Merger with another company

Initial public offering on the stock market

Selling more equity to the venture capital firm for further investment

Management buy out

Answer

Correct Answer: Selling more equity to the venture capital firm for further investment

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2. Who is incharge of the investment process?

The target company

The venture capital firm

The advisors

The people stipulated by the IRS

Answer

Correct Answer: The venture capital firm

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3. Why do venture capitalists typically not sign "non disclosure agreements" which protect the target companies from the venture capitalists stealing their idea?

Target companies often write the

Target companies try to trick the venture capitalists into signing binding agreements.

It is time consuming as the venture capitalist has to talk to a number of companies, and the companies have to make sure the venture capitalist is not in the business of stealing ideas and launching them on their own.

It is not legally required; so they refuse to sign.

Answer

Correct Answer: It is time consuming as the venture capitalist has to talk to a number of companies, and the companies have to make sure the venture capitalist is not in the business of stealing ideas and launching them on their own.

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4. Which of the following would be encouraging for a venture capitalist to see when screening a company?

A management that is focused on getting rich quickly

A management that has invested $100,000 of their own money to prove the concept and prepare for a venture capitalist's entrance

A bad management team with a terrific idea

A company entering a new market with no competition

Answer

Correct Answer: A management that has invested $100,000 of their own money to prove the concept and prepare for a venture capitalist's entrance

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5. Why does a venture capital firm require a substantial amount of equity for the investment?

According to the risk — reward concept, they deserve a large return on their investment as they are taking on a substantial risk.

Because they control the negotiations and hold companies hostage for getting more equity.

Because they are allowed by law to hold as much as possible.

Because it reduces their tax implications through holding more investment.

Answer

Correct Answer: According to the risk — reward concept, they deserve a large return on their investment as they are taking on a substantial risk.

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6. Why would a venture capitalist want to exit a growing company?

Because they don't want to take on additional risk of the company failing down the road

Because of the tax implications if they stay invested too long

Because they want to invest in the competition now that the business model is proven

Because their business model is to help companies grow to a point, get return on their investment, then move onto the next investment

Answer

Correct Answer: Because their business model is to help companies grow to a point, get return on their investment, then move onto the next investment

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7. Why would a venture capital firm require they be on the board of directors if they choose to invest in a target company?

So that they may be able to demand compensation for the board seat, generating revenue

So that they may be able to spy on the company

So that they may be able to help guide the target company and see that they are meeting the goals agreed on

So that they may be able to force the company to make decisions they don't want to

Answer

Correct Answer: So that they may be able to help guide the target company and see that they are meeting the goals agreed on

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8. Why do venture capitalists tend to focus on riskier investments?

They are not regulated and can take on risky investment with a potential for huge losses.

They can receive larger tax write offs since they fail more often than succeed.

There are too many people already investing in low risk industries.

The venture capital model is to invest in early stage companies with large upside potential.

Answer

Correct Answer: The venture capital model is to invest in early stage companies with large upside potential.

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9. Who would be a possible investor in a venture capital firm?

The managing partner of the venture capital firm

A stock broker

A government sector pension fund

Another venture capital firm

Answer

Correct Answer: A government sector pension fund

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10. Which of the following would be the top priority for a venture capitalist in a target company?

A high overhead burden

Top grade management team

Location in a large city

No other investors

Answer

Correct Answer: Top grade management team

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11. Which of the following would be done in the preliminary due diligence?

Checking on the management team and their credentials

Legal investigation

Verifying the financial projections of the target

External research on the target investment and their industry

Answer

Correct Answer: External research on the target investment and their industry

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12. 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

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

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13. 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

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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14. Why do venture capitalists typically involve themselves in an equity base rather than debt?

Because it is easier to structure a deal

Because it is easier to exit the investment

Because they want to participate in the growth of the companies they are investing in, which typically have a high growth potential

Because it is less risky than debt

Answer

Correct Answer: Because they want to participate in the growth of the companies they are investing in, which typically have a high growth potential

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15. Which of the following would be done in the final stage of the due diligence process, once the company has passed the first round of due diligence?

Internal discussion to evaluate the potential of the target company

Detailed analysis of the management team and their capability

External research into the target company's industry

Consultations with the advisors to the venture capital firm about the potential target investment

Answer

Correct Answer: Detailed analysis of the management team and their capability

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16. 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

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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17. Why do few target companies make it past the initial screening?

Because venture capitalists prefer to invest in only one company at a time

Because venture capitalists have strict requirements

Because the number of applicants is very large

Because of the large number of applicants and strict investing criteria of the venture capitalists

Answer

Correct Answer: Because of the large number of applicants and strict investing criteria of the venture capitalists

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18. Why do venture capitalists invest in multiple industries instead of focusing on one specific industry?

They have more money than any one industry; so they have to invest in several to invest it all.

They want to diversify their risk.

They are required to by the SEC.

There are tax advantages for investing in several industries.

Answer

Correct Answer: There are tax advantages for investing in several industries.

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19. What is the approximate size of the venture capital industry in 2009?

More than $30 billion

Less than $5 million

More than $1 trillion

Approximately $1 billion

Answer

Correct Answer: More than $30 billion

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20. Why would a teachers' pension fund, a seemingly conservative pool of capital, invest in a venture capital firm?

They are secretly trying to generate income without letting the teachers know.

The investment in a venture capital firm is most likely a small, though the riskiest, portion of their overall portfolio.

They don't see it as risky and trust the venture capital firm to generate big returns.

There are no laws protecting the teachers; so the pension fund can invest as they deem fit.

Answer

Correct Answer: The investment in a venture capital firm is most likely a small, though the riskiest, portion of their overall portfolio.

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21. Why do venture capital firms focus on three to five industry sectors in their portfolios?

There is a five industry limit by the Securities and Exchange Commission.

It enables them to become experts in the few industries they invest in.

There is less risk involved if they invest in fewer industries.

There are a limited number of investors and thus a limited number of industries.

Answer

Correct Answer: It enables them to become experts in the few industries they invest in.

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22. Why are share transfers tightly restricted by the venture capitalist?

To maintain control of who is involved in the company and can exert control

Because they want the right to buy up more equity given the chance

It is a power play between the management and the venture capitalist

Because it is required by the Securities & Exchange Commission

Answer

Correct Answer: To maintain control of who is involved in the company and can exert control

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23. Why is Pre-money value important to a venture capitalist?

Because it shows how reasonable the target company is

Because it determines how profitable the company will be

Because it shows how much investment the founders have put into the venture

Because it determines the value of the target company before investing, which will in turn determine how much equity the venture capitalist will be given for their investment

Answer

Correct Answer: Because it determines the value of the target company before investing, which will in turn determine how much equity the venture capitalist will be given for their investment

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24. Would a venture capitalist want to have majority control of the board even without majority stock ownership?

No, the board make up reflects the ownership make up

No, it would rather have company officers be in charge

Yes, if the management is inexperienced

Definitely, they want to be able to control the decisions made and guide the company

Answer

Correct Answer: Definitely, they want to be able to control the decisions made and guide the company

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25. Why would a merger with another company also be considered an investment exit?

Because it is mandatory for investors not to be involved post merger

Because it was laid down in the legal documents at the time of merging that the venture capitalist can be bought out

Because the merging company will typically force the venture capitalist out

Because the management will always want to buy out the venture capitalist so they can no longer participate

Answer

Correct Answer: Because it was laid down in the legal documents at the time of merging that the venture capitalist can be bought out

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26. Why is the venture capitalist in charge of the drawing up of the term sheet and not the target company?

Because it is stipulated by law that the venture capitalist gets to draw up all legal documents.

They are not. It can go either way. Both sides can draw it up.

Because the venture capitalist is the one who is investing, and gets to state under what terms they are willing to invest. The target company can either accept or reject them.

Because the venture capitalist has a lawyer and the target company does not.

Answer

Correct Answer: Because the venture capitalist is the one who is investing, and gets to state under what terms they are willing to invest. The target company can either accept or reject them.

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27. Why would specialized consultants be hired for the final stage of the due diligence process?

Because it creates billable hours which are charged to the target company

To verify and confirm the venture capitalist's findings arrived at during their preliminary due diligence

Because it is part of the contract of services to be rendered

Because it allows the venture capitalist to ask for additional equity

Answer

Correct Answer: To verify and confirm the venture capitalist's findings arrived at during their preliminary due diligence

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28. 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

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

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29. Why don't the investors in venture capital firms invest directly in the target companies rather than investing in a venture capital firm as an intermediary?

Because less paperwork is involved

Because it mitigates their costs

Because it gives better returns

Because it diversifies risk as the money is invested in several target companies via the venture capitalist

Answer

Correct Answer: Because it diversifies risk as the money is invested in several target companies via the venture capitalist

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30. Why would a venture capitalist prefer equity to debt?

Because it is less risky

Because it offers a higher interest rate

Because it is easier to liquidate

Because it allows the venture capitalist to participate in the growth of the company as the value grows

Answer

Correct Answer: Because it allows the venture capitalist to participate in the growth of the company as the value grows

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31. Why is personal rapport important?

No one wants to work with someone who is all business no play.

It is not. It is just a small factor in the decision. Profitability is most important.

Nice people tend to do better in negotiations than mean people.

The target company and the venture capitalist will be in business together for several years and need a good working relationship.

Answer

Correct Answer: It is not. It is just a small factor in the decision. Profitability is most important.

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32. Which of the following would be a red flag for a venture capitalist?

No one else has entered the market space.

All the members of the management team come from different backgrounds.

Several competitors have entered and left the market due to low traction.

The company hasn't yet talked to other venture capitalists.

Answer

Correct Answer: Several competitors have entered and left the market due to low traction.

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33. 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

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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34. What is the average size of a venture capitalist's investment in a target company?

From 1 million to 50 million dollars

From 100 thousand to 1 million dollars

At least 50 million dollars

There is no limit

Answer

Correct Answer: From 1 million to 50 million dollars

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35. 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

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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36. What is meant by "screening" in the investment process?

Online submission of the business plan by the target company

Initial examination of the potential investment by the venture capitalist to see whether it fits in their portfolio

The meet and greet meeting held after the venture capitalist has expressed interest in the target company

Examination of the target company by the legal team

Answer

Correct Answer: Initial examination of the potential investment by the venture capitalist to see whether it fits in their portfolio

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37. Does a venture capital exit have any negative impact on the original founders of the company?

Yes; it will definitely drive down the value of the company.

Typically no; the exit just means the end of a successful relationship.

Yes; the employees will question why the venture capitalist is now exiting.

No; it will usually bolster the stock price.

Answer

Correct Answer: Typically no; the exit just means the end of a successful relationship.

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38. What is the minimum that a venture capitalist would expect at the monthly board meeting?

Detailed financial statements, explaining the expenses line by line

That the company invested in is meeting the goals stipulated in the negotiation process, and if not, has an action plan to rectify

An exciting presentation by the CEO

Meeting with individual employees

Answer

Correct Answer: That the company invested in is meeting the goals stipulated in the negotiation process, and if not, has an action plan to rectify

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39. When does the target company actually receive the investment?

Mid way through the process

Usually within two weeks from the start of the process

After the legal closing, on a stipulated closing date

They never receive the full amount and have to request disbursements weekly

Answer

Correct Answer: After the legal closing, on a stipulated closing date

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40. How long does the initial due diligence process last?

4 to 6 weeks

1 to 2 weeks

10 to 12 weeks

Any duration from 1 week to a year

Answer

Correct Answer: 4 to 6 weeks

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41. What is the first step in the process between the target company and the venture capitalist?

The venture capital firm will look online for companies who are looking for capital.

The venture capital firm holds monthly open casting calls for potential companies.

The target company contacts the venture capitalist to introduce the opportunity.

The target company mails the venture capital firm a full business plan and due diligence package.

Answer

Correct Answer: The target company contacts the venture capitalist to introduce the opportunity.

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42. What is meant by the "anti-dilution rights", often found on a term sheet?

Terms that guarantee a specific return on investment

Terms that restrict the target company to no more than three founders owning stock

Terms that protect the venture capitalist from dilution of their investment by the target company by offering subsequent investments at lower valuations to other investors

Terms that prevent original owners from having more stock than the venture capitalist

Answer

Correct Answer: Terms that protect the venture capitalist from dilution of their investment by the target company by offering subsequent investments at lower valuations to other investors

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43. What is the typical process overview?

Submission of Business Plan, Term Sheet, Due Diligence, Legal Closing

Term Sheet, Submission of Business Plan, Legal Closing

Evaluation, Due Diligence, Legal Closing, Business Plan Review

Screening, Kick off Meeting, Evaluation, Initial Due Diligence, Negotiation of Terms, Due Diligence, Legal Closing

Answer

Correct Answer: Screening, Kick off Meeting, Evaluation, Initial Due Diligence, Negotiation of Terms, Due Diligence, Legal Closing

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44. What role does "valuation" play in selecting the most appropriate investment areas?

Valuation gives the venture capitalist a definite value of the target in five years.

Valuation doesn't matter as much as the management team.

Valuation is the target company's expected value at some point in the future, typically five years, and helps the venture capitalist see the potential.

Valuation helps the venture capitalist decide which portfolio to place the target company in.

Answer

Correct Answer: Valuation is the target company's expected value at some point in the future, typically five years, and helps the venture capitalist see the potential.

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45. What does a venture capitalist look like to its investors, based on the way it operates?

A stock broker

A mutual fund

An investment bank

An options trader

Answer

Correct Answer: A mutual fund

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46. What is the main difference between equity and debt?

Equity represents ownership, debt represents a loan to the company.

Debt represents steady earnings, equity represents up and down earnings.

Debt can be secured by assets but equity can not be.

Debt is easier to sell than equity.

Answer

Correct Answer: Equity represents ownership, debt represents a loan to the company.

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47. When is the due diligence process done?

After the initial engagement, but before the completion of the deal

Before getting engaged with the potential target investment

As a final step before the deal is completed

The target investment company would do this before approaching the venture capitalist

Answer

Correct Answer: After the initial engagement, but before the completion of the deal

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48. What is the overall venture capital portfolio expectation?

That ten out of ten companies will be huge successes

That all the ten will perform satisfactorily

That five of the ten will succeed, five will fail

That out of every ten companies invested in, at least one will be a tremendous success, at least five will fail completely, and the other four will break even or be marginally successful

Answer

Correct Answer: That out of every ten companies invested in, at least one will be a tremendous success, at least five will fail completely, and the other four will break even or be marginally successful

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49. What is the primary source of a venture capital firm's funding?

The venture capital firm invests its own equity in other companies.

The partners of the venture capital firm invest individually.

The money is raised through the stock market for the purpose of investing it in companies.

Other companies invest in the venture capital firm which then invests in new ventures.

Answer

Correct Answer: Other companies invest in the venture capital firm which then invests in new ventures.

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50. 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

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

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51. 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

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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52. What is a "first round" investment?

An investment in a company which is at the idea stage

An investment in a company which is early in its growth, typically one generating some revenue

An investment in a company where the venture capitalist is the very first investor

An investment in a company in its first year

Answer

Correct Answer: An investment in a company which is early in its growth, typically one generating some revenue

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53. How much in funding, in general, will an investor want to invest?

Enough to allow the company to survive for three years

Enough to cover management salaries

Enough to allow the company to reach traction and prove their business model, regardless of time line

One year's operating expenses

Answer

Correct Answer: Enough to allow the company to reach traction and prove their business model, regardless of time line

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54. What options does a venture capitalist have when holding convertible debt?

They can choose immediately if they want debt or equity.

They can convert back and forth between debt and equity depending on which is more beneficial.

They can sell off some of the debt before converting the rest to equity.

They can keep their investment as debt, or convert to equity given some predetermined circumstances have occurred.

Answer

Correct Answer: They can keep their investment as debt, or convert to equity given some predetermined circumstances have occurred.

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55. What is meant by "exit strategy"?

It is how the venture capitalist plans to merge with another venture capitalist.

It is how the target company is planning to liquidate all investors and give them a return for their investment.

It is how the target company plans to fire key personnel.

It is how the target company plans to exit their target markets if they are not successful.

Answer

Correct Answer: It is how the target company is planning to liquidate all investors and give them a return for their investment.

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56. What protection do investors in a venture capital fund have?

They are guaranteed at least a 3% return on the investment.

They are guaranteed to double their money within one year.

There is no protection. They are not guaranteed a return on their investment, and it is made very clear that investing in new ventures is risky.

There is no protection. They are told that they may lose their money, but most likely, they will make a lot of money.

Answer

Correct Answer: There is no protection. They are not guaranteed a return on their investment, and it is made very clear that investing in new ventures is risky.

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57. Which of the following would be a possible portfolio for a venture capital firm?

High tech, Entertainment, E-commerce, Food and Beverage

High Risk, Low Risk, Zero Risk

Local, National, Global

Equity, Bonds, Debt, Convertible Debt

Answer

Correct Answer: High tech, Entertainment, E-commerce, Food and Beverage

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58. What would be the attraction of offering a debt round to a target company?

It can earn more money than equity when the company performs well.

It is easier to sell off debt.

It limits how well the management has to perform.

It is less risky, gives the right to demand repayment, and earns interest.

Answer

Correct Answer: It is less risky, gives the right to demand repayment, and earns interest.

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59. What role do committees play?

They act as specialized arms of the board to address specific topics such as Human Resources or Accounting and Finance Matters.

They are at a higher level than the board, and are called in to make decisions when the board can not agree.

They are the key management personnel in the company.

They are formed to organize things such as employee birthday parties.

Answer

Correct Answer: They act as specialized arms of the board to address specific topics such as Human Resources or Accounting and Finance Matters.

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60. What is meant when a venture capitalist talks about the "burn rate"?

The interest rate they expect to earn on their investment

How quickly a target company may burn out, or fail

The monthly amount of cash spent on an average by a target company, which can then be used to calculate how far investment dollars will take the company

How quickly the management team members are phased out

Answer

Correct Answer: The monthly amount of cash spent on an average by a target company, which can then be used to calculate how far investment dollars will take the company

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61. 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

Correct Answer: At least 10 times their original investment

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62. What has been the largest area which venture capitalists have been actively investing in for the last decade?

Local government municipalities, such as utilities

Small businesses such as a brick and mortar store, or a coffee shop

Professional services industries, such as lawyers and accountants

Internet based companies, such as an e-commerce site

Answer

Correct Answer: Internet based companies, such as an e-commerce site

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63. What is the purpose of having portfolios?

To segregate investments into specific categories with similar criteria

To deal with tax implications

To rule out potential investments

To meet the requirements of the SEC

Answer

Correct Answer: To segregate investments into specific categories with similar criteria

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64. What does "deal syndication" on the term sheet address?

It prevents outsiders from investing at all.

It discusses what happens in the event the company fails to execute.

It allows venture capitalists to merge two or more of their investments into one company.

It discusses the process required for additional investors to invest in the target company.

Answer

Correct Answer: It discusses the process required for additional investors to invest in the target company.

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65. When will the venture capitalist show the most active involvement with the company post funding?

At the beginning, offering direction and guidance

After a year, when the company begins to grow

Towards the exit point

Throughout the process

Answer

Correct Answer: Throughout the process

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66. What is meant by Post-money valuation?

It is the expected value of the company after it has received the venture capital investment.

It is the expected value of the company before it has received the venture capital investment.

It is the expected value of the company after five years.

it is the expected value of the company once the venture capitalist exits the company.

Answer

Correct Answer: It is the expected value of the company after it has received the venture capital investment.

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67. What does an exit effectively do?

It allows the investor to put more money into a company to get a better return.

It makes everyone involved rich.

It determines the value of the company at the given point.

It allows the venture capitalist to sell their equity in some fashion, either on the stock market, or to the owners, or to the new owners.

Answer

Correct Answer: It allows the venture capitalist to sell their equity in some fashion, either on the stock market, or to the owners, or to the new owners.

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68. When was the largest burst of activity in the venture capital industry witnessed?

In the 1960s

In late 2000s

In mid 2000s

In early 2000s

Answer

Correct Answer: In early 2000s

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69. What is the importance of the intellectual property (IP) which venture capitalists focus heavily on?

Companies with no IP will never succeed

Companies who have IP may be competing against firms with similar IP

Venture capitalists want to make sure the company is not at risk of being sued over the IP

IP can be a key deciding factor, as the target company's success or failure may hinge on the IP they own

Answer

Correct Answer: IP can be a key deciding factor, as the target company's success or failure may hinge on the IP they own

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70. 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

Correct Answer: That of advisors

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71. How often do venture capital firms change the investments within their portfolios, on an average?

Often, several times a year

Annually

Every three to five years

Almost never

Answer

Correct Answer: Every three to five years

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72. What is the main reason why a venture capitalist does its own evaluation of a target company's projected financials?

Due to their lack of trust in the target company

To check that assumptions are reasonable and the model covers all aspects of the company

To see if there's potential for even more revenue

To spot check for formula errors

Answer

Correct Answer: To check that assumptions are reasonable and the model covers all aspects of the company

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73. What purpose do milestones serve in the term sheet?

They protect the target company in case they don't perform well.

They prevent outsiders from investing until specific goals are met.

They force the management to make decisions they would not want to make otherwise.

They stipulate the goals the target company has to meet in order to receive subsequent amounts of funding.

Answer

Correct Answer: They stipulate the goals the target company has to meet in order to receive subsequent amounts of funding.

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74. What is meant by the right to "observer rights"?

The venture capitalist doesn't have to come to the board meetings

The venture capitalist can bring in an observer, who can not vote, to the board meeting

The company is only allowed to watch board meetings, and not to participate

The company management is required to be present at all board meetings

Answer

Correct Answer: The venture capitalist can bring in an observer, who can not vote, to the board meeting

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75. What are the "conversion rights", typically stated on a term sheet?

They are terms that allow a venture capitalist to sell off their stock at any point.

They are terms that stipulate that the venture capitalists can convert their preferred shares into common shares which will be more easily liquidated.

They are terms that allow the target company to surrender more equity to the venture capitalist if the venture is growing quickly.

They are terms that prevent anyone from selling stock for the first three years.

Answer

Correct Answer: They are terms that stipulate that the venture capitalists can convert their preferred shares into common shares which will be more easily liquidated.

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76. What do veto rights allow the venture capitalist to do?

Call board meetings at any point

Require liquidation within 30 days

Overturn decisions made by the company directors

Fire the management

Answer

Correct Answer: Overturn decisions made by the company directors

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77. When investigating the target market of the potential investment, what will the venture capitalists focus on specifically?

The pricing of the product

The Intellectual Property and any competitors with similar IP

The customer base, the competition, and the opportunity in the market space

Location of competition

Answer

Correct Answer: The customer base, the competition, and the opportunity in the market space

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78. What is a sweeper clause?

It is a clause that requires that the books of the company be kept clean and free of fraud.

It is a clause that requires the attendance of three management personnel at all meetings.

It is a clause that allows the venture capitalist to make requests for financial information from the company from time to time.

It is a clause that allows the venture capitalist not to attend meetings.

Answer

Correct Answer: It is a clause that allows the venture capitalist to make requests for financial information from the company from time to time.

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79. How are the investments in a venture capital firm structured typically?

As limited partners

As shareholders

As a limited liability company

No formal structure agreements are needed

Answer

Correct Answer: As limited partners

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80. What level of involvement will a venture capital firm typically have?

None; their investment is passive

Very active; a venture capital team member will be on site daily

Somewhat active; weekly visits to the target company

No day to day involvement; involvement through participation in the board of directors only

Answer

Correct Answer: No day to day involvement; involvement through participation in the board of directors only

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