1. Which of the following statements ARE CORRECT about the due diligence process? (check all that apply)
Due diligence is a two-way process
Due diligence is not time consuming if done properly
Prospective investors will want to investigate legal, financial, and strategic matters
The key to success in due diligence is advance preparation and cooperation among the parties
2. Which of the following items discovered in the due diligence process could be a cause for concern by an investor, which could ultimately lead to a decision by the investor to NOT invest?
A large shareholder loan that will be paid upon completion of the current financing
Significant related party transactions that are properly documented and performed on an arms-length basis
Large accounts payable for goods and services that are all "current" (i.e., within the terms offered by the vendor)
Accounts receivable from 20 very small customers which are 10 days past due
3. When negotiating term sheets with prospective investors, which of the following are correct? (check all that apply)
Both the investor and the entrepreneur need to win
Compromise indicates to the investor that the entrepreneur is desperate for funding
Experience from past deals should be used to negotiate the current term sheet
Don't take everything the other side says at face value - they may be posturing
4. True or False? Valuation of startup companies can be done objectively by following traditional valuation methods.
True
False
5. Choose that statement that is NOT correct.
ROI = Exit Value / Post-money valuation
If the average PE ratio of companies similar to your company in the industry in which you will operate is 15X, and your projected after tax earnings in year 5 is $3 million, a reasonable exit valuation for your company in year 5 is $45 million
Post-money valuation = Exit Value ÷ ROI
The Wiltbank Study indicates that investors expect an IRR of 15% in six years
6. Which factor(s) can impact the valuation of your company?
A well developed V1 product
Hot sectors
Management team experience
Early traction (revenues, partnerships, etc.)
All of the above
7. Which of the following statements about term sheets is correct? (select all that apply)
They normally include a statement on the use of the proceeds of the investment
They are binding on the investor for 60 days
They state the pre-money valuation and the amount of the investment
No shop clauses are beneficial to the investor but not that company
8. Equity securities include all of the following: (select all that apply)
Warrants
Preferred stock
Convertible notes
Options
9. A cap on a convertible note is used to:
Establish the maximum pre-money valuation at which the note will convert
Put a value on the company
Secure the payment of the note upon liquidation
Put a limit on the maximum interest rate payable on the note
10. Which of the following is NOT a characteristic of Preferred Stock?
Anti-dilution provisions protect the preferred shareholder's pro-rata interests
Preferred stock is an equity investment with some characteristic debt
It is the financing vehicle of choice for venture capitalists
Preferred stock shareholders receive the greater of the original purchase plus accrued dividends OR a percentage of the liquidation proceeds on an ‘as-converted” basis in a standard liquidation of the company