BUS 330 Katona Midterm #2 || A+ Verified Solutions.
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Course
BUS 330 Katona
Institution
BUS 330 Katona
If received investment to get 20% with $10M Pre, how much does each person own ($ and %)? correct answers to own 20% then the current ownership is 80% of new total value. Therefore, divide 10M by 0.8 to get new total = 12.5M post
Investor gets 20% of 12.5M = 2.5M
Owner keeps 80% of 12.5M = 10M
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BUS 330 Katona Midterm #2 || A+ Verified Solutions.
If received investment to get 20% with $10M Pre, how much does each person own ($ and %)?
correct answers to own 20% then the current ownership is 80% of new total value. Therefore,
divide 10M by 0.8 to get new total = 12.5M post
Investor gets 20% of 12.5M = 2.5M
Owner keeps 80% of 12.5M = 10M
Pro RATA rights correct answers Allows previous investors to invest more money in the future
to avoid dilution.
Good for entrepreneur if they like the investor (can get more money from them). Bad for
entrepreneur if they don't like the investor (they want new investors).
VC Funds (limited partners, general partners, portfolio companies) correct answers Limited -
pooled investment, 10 years, large portion of funds invested, high ROI expected
General - manage fund, smaller portion of funds invested, charge management fee, lower ROI
expected
Portfolio - return based on ownership
Term sheet correct answers short summary of investment terms (10-12ish pages). DOES NOT
include all terms (separate longer doc for this)
Not legally binding except confidentiality and no shop (looking for better deal from other
investor) clauses once signed by entrepreneur
Fundraising process correct answers Fundraising/pitching: lots of meetings 3 months - years
Verbal negotiations on valuation: good indicator of funding, depressing
Term sheet and negotiations: short summary of what sides get and protections in place
Due diligence: time consuming, 1-3 months deep dive into company
Full financing docs: long legal docs (entrepreneur pays legal fees). money hopefully in bank
Investor worries during long process correct answers only if other people are interested,
otherwise they don't care how long it takes
Term sheet contains correct answers Financial: Pre, investment, option pool, liquidation, etc
Control: size of and who appoints board, voting % needed to approve, investor rights
Other: re-vesting for founders, information rights, GET A GOOD LAWYER
, Term sheet does NOT contain correct answers Motivations and incentives
Do we want to work together
behavior
law
much legally binding (people might not follow it)
Types of term sheets correct answers Convertible debt: repayment terms, can be converted to
equity
SAFE agreement: more common, will convert to equity but get extra benefits
Convertible preferred equity: more expensive legal fees
Convertible debt termsheet correct answers Debt, amount converts when $$XX raised at YY%
discount, with ZZ% dividend, repay on AA date.
Fast, simple and cheap (1M or less raised)
Doesn't give control or corner cases
SAFE termsheet correct answers founder-friendly: amount, converts when $XX equity raised, at
maximum cap.
Benefit to entrepreneur -> no debt.
Benefit to investor -> maximum cap means they can get very discounted equity
Gives preferred stock
Board of Directors (BOD) correct answers legally required for all companies.
Often includes lead investors.
BOD is CEO's boss
They make decisions for company, employee compensation, stock issuance, guidance,
Responsible for ALL stockholders but have personal interests
BOD Responsibilities correct answers Duty of care: informed decisions
Duty of loyalty: act in best interests of company and stockholders, not self-interest. Conflicts of
interest disclosed
BOD can be sued if duties broken
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