Private Equity & Venture Capital Flashcards
7 cards from real CFM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Private Equity & Venture Capital flashcards as text
In venture capital, what is a 'participating preferred' structure?
Answer: Preferred investors receive their liquidation preference AND then share in remaining proceeds with common shareholders
Participating preferred allows VC investors to first recover their investment, then share in remaining proceeds alongside common stockholders, unlike non-participating preferred.
Which exit strategy typically provides private equity investors with the most control over timing and pricing of their exit?
Answer: Secondary buyout
Secondary buyouts (selling to another PE firm) allow sellers to control timing and negotiate pricing directly, unlike IPOs which depend on market conditions.
What is the primary purpose of a 'ratchet' mechanism in a private equity deal?
Answer: To allow management to earn additional equity if performance targets are achieved
A ratchet aligns management incentives by granting them additional equity ownership when they achieve or exceed agreed financial performance targets.
Series A, B, and C funding rounds in venture capital primarily differ by:
Answer: The stage of company development and typical capital amounts raised
Later series represent more mature stages of development with larger capital raises and typically higher valuations, reflecting reduced early-stage risk.
In a private equity LBO model, 'financial engineering' refers to:
Answer: Using leverage and capital structure optimization to enhance equity returns
Financial engineering in LBOs involves optimizing the debt-equity mix and debt repayment to amplify equity returns beyond what operational improvements alone would generate.
A venture capital firm holds a 20% stake in a startup valued at $50M (post-money). The pre-money valuation was:
Answer: $40M
If the VC holds 20% and the post-money valuation is $50M, the VC invested $10M, making the pre-money valuation $40M.
What distinguishes 'growth equity' from both venture capital and traditional buyout investing?
Answer: It targets established, profitable companies seeking capital for expansion without the use of significant leverage
Growth equity bridges VC and buyout by investing in proven businesses with established revenue that need capital to scale, typically using minimal leverage and acquiring minority stakes.