Question

QUESTION 16

Preemption rights give a Venture Capitalist the right to buy shares in future rounds of financing to preserve their current interest in the company.

True

False

QUESTION 17

Venture capitalists will typically conduct an investigation of the founders and of the company to assure themselves that there has not been and there is not currently any illegal activity being conducted that could damage the company.

True

False

QUESTION 18

Term sheets are used to work out the natural financial and control tensions that exist between founders and venture capitalists. The specifics of a term sheet will vary from deal to deal.

True

False

QUESTION 19

Preferred stock offers investors protections relative to the owners of common shares such as liquidation preferences and anti-dilution protection.

True

False

QUESTION 20

The sole objective of a term sheet from the investor’s point of view is to maximize their upside in the event of an exit.

True

False

Answer 1

Question 16: True

Preemptive rights or anti-dilution rights are privilege extended to specific shareholder that give them the right to purchase additional shares before the shares are offered to general public, as secondary issuing of stocks.

Question 17: True

Venture capitalists (VCs) fund promising start-ups. This is equity financing, and carries substantial risks, because if the start-up fails to take off, then the money invested by the venture capitalist may be entirely lost. So, considering the high risk, it is prudent of VCs to conduct investigation of the founders and of the company to ensure that they are not involved in any illegal activity.

Question 18: False

Term sheet carries the formal outline of broad parameters which the venture capitalists use to consider negotiating an investment in the start-up. Except the confidentiality clause, none of the terms in the term sheet is binding on the parties involved.

Question 19: True

Preferred stock gives investors rights above and beyond that of common stock holders. Liquidation preference ensures that investors are paid first in the event of liquidation, bankruptcy, acquisition or sale of assets. There are two kinds of anti dilution rights - Full-ratchet and weighted average. Full ratchet anti dilution rights provide the right to a series A investor to convert the value of its $ 2 share into $ 1 share and double its number of shares, when the company raises capital in series B at $ 1 per share.

Question 20: False

Term sheet is a document that carries the outline of broad parameters of investment from the perspective of a potential investor.