MGMT FE 247 VC&PE 2024 - Super Saturday #3 Quiz Show

Cash Flow Rights in Venture Capital

Brian J.Broughman, July 2023

The Palgrave Encyclopedia of Private Equity

What priority rank do VC investors with preferred stock hold in the startup’s capital structure?

• They rank below common stockholders.

• 
  They have priority over common stockholders but may vary among other preferred stockholders.

• They rank "pari passu" (equally) with other classes of preferred stock.

• They always have the highest priority in any capital structure.

Cash Flow Rights in Venture Capital

Brian J.Broughman, July 2023

The Palgrave Encyclopedia of Private Equity

According to the literature, what are some ways in which cash flow renegotiations might play out?

• VCs always increase their liquidation preferences in renegotiations.

• The company must go public to resolve any cash flow right issues.

• Common stockholders sometimes receive an equity carveout, or earlier investors might waive their liquidation preferences.

• Founders usually buy back stock to resolve renegotiations.

Preferred Stock Liquidation Preferences

Robert P. Bartlett, December 2023

The Palgrave Encyclopedia of Private Equity

According to the author, which of the following is NOT a major distinction between preferred stock acquired by VCs that invest in startups and common stock owned by the founders and employees?

• Preferred stock includes governance rights such as veto powers and board representation.

• 
  Preferred stock does not participate in the upside potential of the company unless converted into common stock.

• 
  Preferred stockholders typically receive their investment back before any distributions to common stockholders.

• Preferred stock guarantees a fixed dividend payment schedule.

Preferred Stock Liquidation Preferences

Robert P. Bartlett, December 2023

The Palgrave Encyclopedia of Private Equity

Why would a "non-participating 1x liquidation preference" ever be favorable from a VC’s perspective?

• 
  It ensures participation in any profit above the initial investment without having to convert into common stock.

• 
  It allows VCs to receive multiple times their investment back, regardless of the company's exit value.

• 
  It provides a return of the initial investment before any common stock distributions in a liquidation event.

• It offers continuous dividend payments irrespective of company performance.

Preferred Stock Liquidation Preferences

Robert P. Bartlett, December 2023

The Palgrave Encyclopedia of Private Equity

Why might investors be required to convert their preferred stock into common stock at the time of a company's IPO?

• To simplify the company's capital structure for new potential investors.

• 
  To ensure that all stockholders can sell their shares during the IPO.

• To increase the value of the common stock by reducing the outstanding preferred shares.

• To allow the company to avoid paying dividends on preferred stocks post-IPO.

Parushev (2018)

What is the primary motivation behind the development of the Private Equity Scorecard Approach (PESA) as described by the author?

• 
  To simplify the valuation process using heuristic-based methods.

• 
  To replace traditional financial metrics with exclusively qualitative indicators.

• To incorporate machine learning into the scorecard approach for private equity investment.

• 
  To address the lack of measurable and systematic evaluation methods in private equity.

Parushev (2018)

What role do Key Performance Indicators (KPIs) play in the Private Equity Scorecard Approach?

• 
  KPIs provide a framework for measuring strategic and operational goals in alignment with company strategy.

• KPIs are only used post-investment to assess management performance.

• KPIs are used to measure the performance of financial analysts only.

• 
  KPIs are irrelevant in the scorecard approach.

Hooke (2024)

According to the author, which valuation method is perceived as too subjective due to uncertain projections and speculative terminal values?

• 
  Comparable public companies

• Discounted Cash Flow (DCF)

• Comparable acquisitions

• Leveraged Buyout (LBO)

Hooke (2024)

What is a “control premium” and how does its presence affect the valuation in the comparable acquisitions methodology?

• 
  It increases the valuation to reflect full ownership and control benefits.

• 
  It has no impact on valuation as it is considered only in public markets.

• 
  It reduces the valuation due to increased risk from complete ownership.

• It adjusts the valuation based on the minority interest discount.

Brown and Volckmann (2024)
What role do 'subscription lines of credit' play in private equity financing, and what impact do they have on private equity performance?

• 
  They are used to permanently finance investments, decreasing the Internal Rate of Return (IRR) due to increased debt.

• 
  They primarily serve to increase Net Asset Value (NAV) by providing funds with immediate liquidity.

• They decrease the Multiple on Invested Capital (MOIC) by reducing the time investments are held.

• They allow fund managers to delay capital calls, which can artificially increase the fund's IRR in the short term by compressing the time between capital calls and distributions.