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Venture Capital Exam 2 questions with verified solutions
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Venture Capital Exam 2 questions with verified solutions
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Venture Capital Exam 2goals of private equity securities (4) - correct answer ✔✔protection of parties involved; control of firm;
reward for value creation; incentive structure
protection for parties involved - correct answer ✔✔GP & entrep; not just GP but TC too; not saying they
necessarily achieve that goal
reward for value creation - correct answer ✔✔how much do i give to entrep right away? proper
incentivization?
incentive structure - correct answer ✔✔all parties feel properly rewarded for moving in right direction
and participating
different kinds of equity securities - correct answer ✔✔common stock, redeemable preferred stock,
convertible preferred stock; participating convertible preferred stock
intrinsic enterprise value - correct answer ✔✔real value right now and they make an honest investment
to this idea right now-GP and TC agree on this
structure of chart - correct answer ✔✔initial investment; cash flows from buyout (money paid x
percentage ownership) (or cash flow to pref stock and cash flow to common stock); net cash flow
problem with common stock below IEV - correct answer ✔✔TC is gaining purely at GPs expense
cash flows from buyout from investment banker - correct answer ✔✔investment banker gains control of
only cash sitting in company
problem for payoffs of common sock investment for over IEV - correct answer ✔✔GP gets a return now,
but still disproportionate. TC did nothing but walks away with a ton
, what went wrong for the GP (luke) in common stock payoff (5) - correct answer ✔✔owernship (no
control-susan had it); no protections (covenants-ex 2/3rd vote of stakeholders for sale of company); no
vesting; no rewards for value creation; no preference (TC was lumped in with GPs-GPs was not protected
w/preference for selling)
how can a GP avoid common stock situation? (3) - correct answer ✔✔use preferred stock; vesting;
restrictive covenants (supermajority vote)
which of the parties loves issuing common stock? - correct answer ✔✔entrepreneurs
redeemable preferred stock attributes (3) - correct answer ✔✔liquidation or sale proceeds must be paid
to preferred stock holders before common stock holders (creates distribution order); typically no
dividend in PE world but in public world yes (makes no sense for getting cash and paying it back out);
firm is obligated to mandatorily redeem the face value of pref stock within a particular time frame
what is the face value of preferred stock - correct answer ✔✔cost basis=how much did you invest
another name for redeemable preferred stock - correct answer ✔✔straight preferred stock
what is time period usually for mandatory redeem of face value of pref stock - correct answer ✔✔the
sooner of an IPO or 5-8 years: if we haven't gone public or been sold at year 7 get back $$ from pref
stock
why is this pref stock time provision in place - correct answer ✔✔some companies not doing so badly
that they go bankrupt or so well for public offering-middle group that VC doesn't wanna deal with -
limiting life is an added incentive structure called *mandatory redemption* for living dead firms
problem with redeemable preferred stock payout of less than IEV/more than IEV - correct answer ✔✔GP
did not get any share in profits/value -->GP has safety/preference now but not able to get any value
creation
what does less than IEV mean - correct answer ✔✔below the idea of what the firm is worth
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