READ THIS BEFORE
The easiest exam I’ve ever taken at KTH. The overlap between old exams and the new ones is staggering. Meaning that; if you do one or two exams (half-assed) you’ll be prepared for the exam. I finished in 45 minutes.
- A table that explains “Who owns what shares?”
- Outlines the company’s ownership structure
- and the classes of securities ex. Preferred Stock, options, warrants.
Convertible Preferred Stock “Give med debt or equity if you have down round”
Preferred terms refer to the specific terms and conditions associated with preferred shares
Exam 2022-10
Question 1 - Explain basic words from the course - (1p each)
a) The Capitalization table - In the cap-table, founders can systematically keep track of the shareholders eg. ownership fraction and investment amounts.
- FFF = Family, friends and fools or family, friends and founders. These are early stage investors, pre-seed or seed stage, where their relationship is the main investment motive.
- Crowdfunding is a type of funding where the investment for making a product or service is sourced/funded by a crowd or community, usually to which the start-up aims to sell their product. There are a few plattforms that work as intermedieries who provide an online platform.
- Raising capital at a lower valuation than the previous round of funding.
e) ””_________” are transition points at which the business achieves a major goal that reveals
important information in a discontinuous fashion.” What is the missing concept? - The missing word is milestone.
- Milestones are achievements that de-risk the venture and signals significant progress towards the company’s success.
- Pro-rata is a latin term that means “in proportion”, if a you have an ownership fraction on pro-rata terms. Let’s say, 20%, you have the right to invest along the following rounds to defend that 20% position in the company.
- Refers to the a shareholder right to force other shareholders to sell or exit at the same terms. This term is commonly stipulated at X% majority of shareholders will have drag along rights.
- Refers to an Investors constant stream of attractive deals, founders look for the best investors and a high quality deal flow proves their investment skills.
Question 2 - Explain and give examples of 4 concepts - (1p each)
a) Give three examples of milestones, each for a different part of the company. (3 p)
Milestones are achievements that de-risk the venture and signals significant progress towards the company’s success.
Team Milestone - The founders hiring their first engineer, preferably top talent. The first hire is actually quite shitty deal in terms of risk vs reward for the first hire. Getting a top talent engineer to join as an employee is a really good milestone.
Customer Milestone - Signing the first sale of a product is a good milestone, it somewhat validates the need for the company and product.
Product Milestone - Delivering a GDPR compliant SaaS-product to a customer. You don’t need GDPR compliance when you’re testing a product, but getting it GDPR ready for delivery means that it can be commerically sold at scale. Which is product specific milestone.
b) Explain dilution, and how anti-dilution rights work
- Dilution occurs when the company issues new shares, which happens when they raise capital. Think of it like adding more water to a pond of salt-water.
- Pro-Rata rights mean that an investor can re-invest in the next round in proportion to his current ownership. If he/she does not invest, he/she will be diluted in ownership %
- There are two main types of Anti-dilution provisions
- Full Ratchet Anti-dilution: In a down-round, the investor can convert his preferred shares into common shares effectivly defending his pro-rata investment without investing again in the company.
- Weighted Average Anti-dilution: It takes into account not only the lower-priced shares issued but also the total number of shares in the company's capital structure. It calculates a weighted average price for the original investor's shares, and the conversion ratio is adjusted based on this new average.
c) Explain the properties of convertible preferred stocks and preferred terms. (3 p)
Preferred terms
Preferred terms refer to the specific terms and conditions associated with preferred shares.
Convertible preferred stock
- Is a financial security often used by large investors to protect downside.
- In the case of liquidation, it gives the investor the right to choose between a debt-like or equity like payoff
“Give med debt or equity if you have down round”
d) Explain what syndication is and give three reasons to syndicate. (3 p)
Syndication is when several investors close a deal jointly, which can be beneficial for
- The investors gain diverse opinions
- Complementary networks, skills and/or assets
- Allows diversification
Q3 - The VC Model (11p)
The VC-model is an important part of entrepreneurial finance. Please answer the following.
a) Please use the figure to explain the structure of the VC-model: the parts (A, B, C, and D) and the flow E (grey arrow from A to D) and the flow F (grey arrows from D to C). (6 p)
b) What is the time horizon of a venture fund, what are its two time periods called, and approximately how long are they? (3 p)
c) Explain the management fee and the carried interest. (2 p)’
a) Answer to The VC model in above picture ✅ A = Limited partners, often institutional investors such as pension funds. They contribute with money to the VC firms fund.
B = General Partners, the people working at the VC firm, thay are the responsible capital allocators or the people who pull the trigger on the investments the VC-firm makes.
C = The start-up or entrepreneur that aims to raise money from the VC firm.
D = The fund Vehicle, where the capital contributions from the LP’s are allocated.
The flow
E: A→ D = Limited partners putting money in the fund.
B→ D = The general partners money, that they have invested in the fund. (Skin in the game)
D→ C = The start-up withdrawing money from the fund to finance it’s operations and future investments.
F: D → B = The interest or Fee the general partner recieves for allocating the limited partners money.
- A usual time horizon for a venture fund is 10-years. It consists of an investment period and a harvers period.
- In general, the investment period covers the most of the cycle - The harvest period is the final part of the period, where returns to the fund are obtained.
c) Management fee and interest ✅ Management fee - A fixed amount that the Limited partners pay the VC-firm or general partners, for allocating their money.
Interest - Based how well the fund performs, the VC;s get a bonus based on their performance in form of an interest rate on the money returned. It’s an incentive mechanism that is regulated by
Q4 - Questions about staging - (7p)
a) Name two benefits of staging for the investor. (2 p)
- Liquidity risk is reduced when the full amount is not paid up-front.
- Staged financeing gives the investor more control as the entrepreneur then dependent on future funding rounds.
b) Name one benefit of staging for the entrepreneur. (1 p)
- The best start-ups grow despite extreme contraints - Not having money is actually beneficial for the venture.
- It also can reduce the cost of capital relative to raising the full amount.
c) Explain the main difference between staging and tranching. (2 p)
- Tranching is more time efficient way to raise capital. It’s a “Villkorad” capital raise.
- The company gets more money when they reach their next milestone. Eg. show progress and get more capital. This also means that negotiations do not need to be made along the way.
d) Explain the liquidation stack. (2 p)
The liquidation stack organizes the priority of the different types of shares issues in the different financing rounds, for example common shares, preferred shares, series A, Series B
Q5 - The four types of exits a start-up can do (12 p)
Describe the four main types of exit and their respective pros and cons. (12 p)
Re-Exam 2022-12
Question 1. (10 p)
Please answer the following questions briefly.
a) Name two of the columns that are found in the Capitalization Table. (2 p)
b) What are the two benefits of staging for the investor? (2 p)
c) What is the main benefit of staging for the entrepreneur? (1 p)
d) Explain what syndication is and give two reasons to syndicate. (2 p)
e) What is a Down Round? (1 p)
f) Explain Pro Rata and dilution. (2 p)
Q2 (10 p)
Please answer the following.
a) Give two examples of milestones, each for a different part of the company. (2 p)
b) Explain in detail the properties of convertible preferred stocks. (2 p)
c) One of the exit types is acquisition. Explain in detail this type of exit. What are the arguments for and against this type of exit, for the seller (investor and venture) and the buyer? (6 p)
Q3 (10 p)
The VC-model is an important part of entrepreneurial finance. Please answer the following.
a) Give a detailed explanation of A, B, C and D in the structure of the VC-model. (8 p)
b) Explain the management fee and the carried interest. (2 p)
Q4 (10p)
Investors, such as venture capital, FFF, business angels, and crowdfunding, differ in terms of their expertise, their deal generation, the investment securities they rely on and their corporate governance:
a) Compare the four investors in terms of expertise. (4 p)
b) Compare the four investors in terms of deal generation. (4 p)
c) Compare the four investors in terms of investment securities. (6 p)
d) Compare the four investors in terms of corporate governance. (6 p)
Partial exam 2023
1. What is the Capitalization table? ✅
A Capitalization Table, often abbreviated as "Cap Table," is a document that provides a comprehensive summary of a company's equity and the ownership structure. It outlines the various classes of securities, such as common stock, preferred stock, options, and warrants, and shows how these securities are allocated among the company's founders, investors, employees, and other stakeholders.
2. Name a benefit of staging for the investor. (1 p) ✅
Staging a startup pitch or business plan can make it more visually appealing and engaging for potential investors. This can help investors better understand the business concept, market potential, and the team's capabilities.
3. What is the main benefit of staging for the entrepreneur? (1 p) ✅
Higher valuation of their start-up
4. What is syndication? (1 p) ✅
Syndication refers to the practice of pooling resources and investments from multiple individuals or entities to collectively fund a project or investment.
5. What is a Down Round? (1 p) ✅
A Down Round is a capital raise, at a lower valuation than the previous round of financing. In essence, the start-up needs capital to survive and is then forced to raise capital at a lower valuation than it previously did.
6. Explain Pro Rata. (1 p) ✅
"Pro rata" is a Latin term that means "in proportion” - if investors have a pro rata right in a new round of financing for a company, it means they have the opportunity to invest additional capital in proportion to their existing ownership stake. If an investor owns 20% of a company, they would have the right to invest 20% of the new funding round.
7. What does seniority mean? (1 p) - Who gets their money first
8. You read in the paper that Company A is finishing a round of MSEK 30, at a post-money valuation of MSEK 230. What is the pre-money valuation of Company A? (1 p) 9. Convertible preferred shares include a “preferred return” (or “preferred terms”). Please explain what this is. (1 p) 10. Explain Drag-Along Rights. (1 p) 11. What does Deal Flow mean? (1 p) 