Private Equity terms Review Questions and Answers Graded A+
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Private Equity terms
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Private Equity Terms
Private Equity terms Review Questions and Answers Graded A+
"A" round - Answers a financing event whereby venture capitalists become involved in a fast growth company that was previously financed by founders and/or
angels.
Accredited investor: - Answers a person or legal entity, such as a compan...
Private Equity terms Review Questions and Answers Graded A+
"A" round - Answers a financing event whereby venture capitalists become involved in a fast growth
company that was previously financed by founders and/or
angels.
Accredited investor: - Answers a person or legal entity, such as a company or trust fund, that meets
certain net worth and income qualifications and is considered to be
sufficiently sophisticated to make investment decisions in complex situations. Regulation D of the
Securities Act of 1933 exempts accredited investors from
protection under the Securities Act. Typical qualifications for a person are: $1 million net worth and
annual income exceeding $200,000 individually or
$300,000 with a spouse. Directors and executive officers are considered to be accredited investors.
Alternative asset class: - Answers class of investments that includes private equity, real estate, and oil
and gas, but excludes publicly traded securities. Pension plans,
college endowments and other relatively large institutional investors typically allocate a certain
percentage of their investments to alternative assets with an
objective to diversify their portfolios.
Angel: - Answers a wealthy individual that invests in companies in relatively early stages of
development. Usually angels invest less than $1 million per startup. The
typical angel financed startup is in concept or product development phase.
Anti-dilution: - Answers a contract clause that protects an investor from a substantial reduction in
percentage ownership in a company due to the issuance by the
company of additional shares to other entities. The mechanism for making adjustments is called a
Ratchet.
"B" round: - Answers a financing event whereby professional investors such as venture capitalists are
sufficiently interested in a company to provide additional funds
after the "A" round of financing. Subsequent rounds are called "C", "D" and so on.
Best efforts offering: - Answers a commitment by a syndicate of investment banks to use best efforts to
ensure the sale to investors of a company's offering of
securities. In a best efforts offering, the syndicate avoids any firm commitment for a specific number of
shares or bonds.
,Beta Product: - Answers a product that is being tested by potential customers prior to being formally
launched into the marketplace.
Blow-out round: - Answers Cram-down round
Board of directors: - Answers a group of individuals, typically composed of managers, investors and
experts, which have a fiduciary responsibility for the wellbeing
and proper guidance of a corporation. The board is elected by the shareholders.
Boat anchor: - Answers a person, project or activity that hinders the growth of a company.
Bootstrapping: - Answers the actions of a startup to minimize expenses and build cash flow, thereby
reducing or eliminating the need for outside investors.
Bridge financing: - Answers temporary funding that will eventually be replaced by permanent capital
from equity investors or debt lenders. In venture capital, a bridge
is usually a short term note (6 to 12 months) that converts to preferred stock. Typically, the bridge
lender has the right to convert the note to preferred stock
at a price that is a 20% discount from the price of the preferred stock in the next financing round. See
Wipeout bridge and Hamburger Helper bridge.
Broad-based weighted average ratchet - Answers - a type of anti-dilution mechanism. A weighted
average ratchet adjusts downward the price per share of the
preferred stock of investor A due to the issuance of new preferred shares to new investor B at a price
lower than the price investor A originally received.
Investor A's preferred stock is repriced to a weighted average of investor A's price and investor B's price.
A broad-based ratchet uses all common stock
outstanding on a fully diluted basis (including all convertible securities, warrants and options) in the
denominator of the formula for determining the new
weighed average price. See Narrow-based weighted average ratchet
Burn rate: - Answers the rate at which a startup with little or no revenue uses available cash to cover
expenses. Usually expressed on a monthly or weekly basis.
Business plan: - Answers a document that describes a new concept for a business opportunity. A
business plan typically includes the following sections: executive
summary, market need, solution, technology, competition, marketing, management, operations and
financials.
, Buyout: - Answers a sector of the private equity industry. Also, the purchase of a controlling interest of a
company by an outside investor (in a leveraged buyout) or a
management team (in a management buyout).
Buy-sell agreement: - Answers a contract that sets forth the conditions under which a shareholder must
first offer his or her shares for sale to the other shareholders
before being allowed to sell to entities outside the company.
C corporation: - Answers an ownership structure that allows any number of individuals or companies to
own shares. A C corporation is a stand-alone legal entity so it
offers some protection to its owners, managers and investors from liability resulting from its actions
Capital call: - Answers when a private equity fund manager (usually a "general partner" in a partnership)
requests that an investor in the fund (a "limited partner")
provide additional capital. Usually a limited partner will agree to a maximum investment amount and
the general partner will make a series of capital calls
over time to the limited partner as opportunities arise to finance startups and buyouts.
Capitalization table: - Answers a table showing the owners of a company's shares and their ownership
percentages. It also lists the forms of ownership, such as
common stock, preferred stock, warrants and options.
Capital gains: - Answers a tax classification of investment earnings resulting from the purchase and sale
of assets. Typically, an investor prefers that investment
earnings be classified as long term capital gains (held for a year or longer), which are taxed at a lower
rate than ordinary income.
Capital stock: - Answers a description of stock that applies when there is only one class of shares.
This class is known as "common stock".
Capped participating preferred stock: - Answers preferred stock whose participating feature is limited so
that an investor cannot receive more than a specified
amount. See Participating preferred stock.
Carried interest: - Answers a share in the profits of a private equity fund. Typically, a fund must return
the capital given to it by limited partners plus any preferential
rate of return before the general partner can share in the profits of the fund. The general partner will
then receive a 20% carried interest, although some
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