Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Private Equity > Lecture 3 > Flashcards

Lecture 3 Flashcards

1
Q

What is the gross value multiple ?

A

GVM = (Total distributions to LPs + value of unrealized investments + carried interest) / invested capital

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What are initial VC financing offers accompanied by ?

A

Terms and conditions detailed in term sheet

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is the term sheet’s aim ?

A

Protect investors from expropriation and this specific to round of financing

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What does typical term sheet include ?

A
  • Capitalization table
  • Charter
  • Investors rights agreement
  • Other items
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is $ investment ?

A

Amount of investment LPs make in firm (sometimes in multiple tranches)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is the fully diluted share count ?

A

Shares in firm assuming all preferred stock converted to common and options exercised

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is the proposed ownership percentage ?

A

Shares LPs receive divided by fully diluted share count

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is the original purchase price ?

A

Price at which stock of firm will be sold to investors (LPs)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is the aggregate purchase price ?

A

APP = OPP x shares purchased

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is the post-money valuation ?

A

Price per share x fully diluted share count

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is the post-money valuation (2) ?

A

$investment / proposed ownership percentage

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is the pre-money valuation ?

A

post-money valuation - $investment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is the pre-money valuation (2) ?

A

Price per share x pre-transaction (fully diluted) share count

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is the deemed liquidation event ?

A

Firm sold, merged or shut down

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is the liquidation preference (2X,3X, etc…) ?

A

Seniority with which proceeds of deemed liquidation event are distributed to investors

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is a qualified public offering ?

A

Event triggering automatic conversion of convertible preferred stock

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is the main feature of dividend preferred ?

A

Paid before dividend to common stock

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What are cumulative and non cumulative dividends to preferred stock ?

A

If cumulative : accumulated dividends f not paid

If non-cumulative : accrue only during final period before paid

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What are accrued cash dividends

A

Dividend paid upon deemed liquidation event

20
Q

What are stock dividends ?

A

Payment-in-kind dividends

21
Q

What is the limitation of stock purchased in private transactions ?

A

Cannot abe sold in public offering. Need to register stock to lose restriction

22
Q

What are the registration rights ?

A
  • Demand : investors can force firm to register
  • S-3: useful only if firm reports to SEC
  • Piggyback : investors can register shares when registered transaction prepared for other shares
23
Q

What are the redemption rights ?

A

Specify conditions under which company needs to redeem (buy back) initial investment

24
Q

What is the Rule 144 ?

A

Exception allowing shares to be sold to public after have been held for certain period of time

25
Q

What is the Rule 144A ?

A

Exception allowing resale of stock to Qualified Institutional Buyers

26
Q

What are the lockup restrictions ?

A

Insiders cannot sell stock for number of days after IPO

27
Q

What are the other issues ?

A
  • Key employees often paid in shares
  • Step vesting : when vesting happens over periodical terms
  • Cliff vesting : when vesting takes place all at once
  • Right to first offer : later round investors offered shares sold by founders before other investors
  • Right to first refusal: Later round investors offered shares at price offered to other parties
  • Drag-along rights : selling investor given right to force other investors to sell stakes at same price (useful for forcing firm sale)
  • No shop: firm obliged not to solicit offers from other parties while deciding current offer
28
Q

What securities do GPs often receive ?

A

Preferred stock in various forms

29
Q

What do the owners of financed firm maintain ?

A

Common stock

30
Q

What securities do employees often receive ?

A

Options

31
Q

What are the payoffs of these securities ?

A

Depends on exit proceeds

32
Q

What are redeemable preferred stocks ?

A
  • Senior to common stock
  • Pays owner up to fixed amount per share
  • Often only part of total package
  • Payoff = straight debt
33
Q

What is the payoff schedule of a RP + common stock ?

A

Not simple addition of payoff lines, because under the fixed amount per share of RP, all proceeds are given to RP holders and common stock is worthless.

34
Q

What are convertible preferred stocks ?

A
  • Senior to common stock
  • Pays owner up to fixed amount per share
  • Often only part of total package
  • Payoff = straight debt
35
Q

What are the characteristics of Participating Convertible Preferred Stock ?

A
  • Entitled to retrieve from exit proceeds original purchase price in priority
  • After participate with common shareholders to remaining proceeds on an as -converted basis
  • Close to RP + Common stock but only when conversion to common stock voluntary
  • Difference when clause included making conversion to common stock mandatory under certain conditions.
36
Q

What if there is redeemable preferred + convertible preferred ?

A

Priority between RP and CP = does not matter for sum of payoff

37
Q

Why is there anti-dilution protection ?

A
  • Often financing in VC = stages

* Early stges VCs wish protect investment vs dilution = reduction of value because of later round of issuances.

38
Q

What are the forms of antidilution protection ?

A

• Full ratchet protection
• Weighted average protection
o Broad based
o Narrow based

39
Q

What happens with full ratchet protection ?

A

If financed firm issues additional shares at purchase price < current conversion price, conversion price reduced to price at which new shares are issued

40
Q

How is the full ratchet calculated ?

A

Adjusted conversion price set to lowest conversion price of any later stock sale and adjusted conversion rate = OPP divided by adjusted conversion price
! Calculation takes place even if new round of financing only for one share

41
Q

What does the Weighted average protection differently ?

A

Uses formula for adjusting conversion price that takes into account size of current + past rounds

42
Q

How it the Broad-Base wieghted average anti-dilution calculated ?

A

CP2 = adjusted conversion price = CP1 x (A+B)/(A+C) where :
• CP2 = new series A conversion Price
• CP1 = Series A conversion price in effect immediately prior to new issue
• A = # of shares of common stock deemed to be outstanding immediately prior new issue (only exclude convertible securities from this round of financing)
• B = aggregate consideration received by corporation w. r. to new issue divided by CP1
• C = # of shares of stock issued in subject transaction

43
Q

What is CP2 x (A+C) ?

A

New number of shares times adjusted conversion price

44
Q

What is CP1 x A ?

A

Value of firm before dilution

45
Q

What is CP2 x (A+C) ?

A

Value of firm before dilution + $ new money

46
Q

What is the difference between Broad-Base and Narrow-Base Average Anti-Dilution ?

A

A (narrow base ) excludes all shares of outstanding common stock and all outstanding options on as-exercised basis. Otherwise everything the same

Private Equity (10 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions