Private Equity Securities

Question 1

What are the 3 key components of a venture security?

Answer 1

1-Preferred Stock
2-Vesting of founder, management, and key employee shares.
3-Covenants and supermajority provisions.

Question 2

What essential factor differentiates preferred stock from common stock?

Answer 2

liquidation

Question 3

Redeemable Preferred Stock

Answer 3

aka “straight preferred” no convertibility to equity. Must be redeemed typically sooner of IPO Or 5 to 8 years.

Face Value + Dividend

In PE combination of common stock or warrants.

Question 4

Convertible Preferred Stock

Answer 4

Shareholder has the option to convert the preferred stock into common stock. Choice to pick returns either liquidation or common equity. (Typically has a mandatory conversion term for an IPO, also has anti dilution provisions).

Question 5

Participating Convertible Preferred Stock

Answer 5

In the event of sale or liquidation shareholder receives the face value and the equity participation. Functions like a redeemable preferred structure and converts to common on a public offering.

Question 6

Vesting

Answer 6

period of time an employee must work or until value accretion occurs the stock isn’t owned. The “golden handcuffs”

Question 7

Covenants

Answer 7

Contractual agreements between the investor and the company. Two types positive and negative.

Question 8

Positive Covenants

Answer 8

List of things the company agrees to do.

Question 9

Negative Covenants

Answer 9

Restrictions or limitations imposed on the entrepreneur by investors.

Question 10

“put” in reference to covenants

Answer 10

Forces the invested company to repay the investors. Forces liquidation or merger.

Question 11

What are the two reasons mandatory redemption provisions exist?

Answer 11

1-Venture Partnerships have limited life so needs mechanism to provide liquidity
2-Prevents lifestyle companies

Question 12

Common Stock

Answer 12

security representing ownership rights in a company. It usually entitles a one share one vote.

Question 13

Pre-money Value

Answer 13

the valuation of a company immediately before an injection of capital occurs.

Pre Money Value = Total Number of Old Shares * Share Price
Pre Money Value = Post Money Value - New Investment

Question 14

Post-money Value

Answer 14

valuation including the capital provided by current round of financing.

Post Money Value = Pre Money Value + Investment
Post Money Value = Investment/% Ownership Acquired
Post Money Value = Total Shares (includes old and new) * Share Price
Share Price = Investment/Number of new shares issued

Question 15

Step-ups

Answer 15

describes the increase in share price from one financing round to the next. Also describes the increase in value of company since last round.

Question 16

Multiple Liquidation Preference

Answer 16

gives preferred stock holders of a specific round of financing the right to a multiple of their original investment if the company is sold or liquidate. Still allows the investor to convert to common stock.

Question 17

Convertible Debt

Answer 17

Loan vehicle allows lender to exchange the debt for common shares at a preset conversion ratio.

Question 18

Mezzanine Debt

Answer 18

Debt with lower priority than senior debt, usually has higher interest rate, and often includes warrants.

Question 19

Senior Debt

Answer 19

higher prior than other loans or equity stock in case of liquidation

Question 20

Subordinated Debt

Answer 20

loan with lower priority than senior in case of liquidation.

Question 21

Warrants

Answer 21

derivative securities that give the owner right to purchase shares at a pre-determined price. Typically issued concurrently with preferred stock or bonds.

Question 22

Options

Answer 22

rights to purchase or sell shares of stock.

Question 23

Anti-Dillution

Answer 23

referred to as ratchets protect the investor from dilution in down rounds. Two types full ratchet and weighted average ratchet.

Question 24

Full Ratchets

Answer 24

If the company issues stock at a lower price than existing preferred stock, then the existing stock holder is protected. The pre-existing preferred stock ratchets down to the new lower price, and accumulates more shares.

Question 25

Weight Average

Answer 25

less harsh than full ratchets. Adjusts the investors conversion price downward based on the number of shares in the new (dilutive) issue.

New Conversion price = (A+C)/(A-D) * old version price

Question 26

Pay to Play

Answer 26

requires an investor to participate proportionally to their ownership share in down rounds.

Question 27

Bridge Financing

Answer 27

Short term financing designed to either to be repaid or converted into ownership securities.

Question 28

Phased Financing

Answer 28

Incremental financing in tranches.