Entrepreneurship Funding and Finance 2 — Questions and Answers
Question 1: What is crowdfunding?
- A method of raising small amounts of capital from a large number of people, typically via an online platform (Correct answer)
- A government program that funds community businesses
- A type of bank loan for nonprofits
- A partnership between two competing businesses
Correct answer: A method of raising small amounts of capital from a large number of people, typically via an online platform
Crowdfunding allows entrepreneurs to raise funds from the public through platforms like Kickstarter or Indiegogo, often in exchange for rewards or equity.
Question 2: What does 'pre-money valuation' mean?
- The value of a company before it starts generating revenue
- The value of a company before receiving new investment (Correct answer)
- The amount a founder invested personally before launch
- The projected valuation after five years of growth
Correct answer: The value of a company before receiving new investment
Pre-money valuation is the agreed-upon value of a company immediately before a new round of investment is added.
Question 3: What is equity dilution?
- A decrease in product quality over time
- The reduction of an existing shareholder's ownership percentage when new shares are issued (Correct answer)
- The depreciation of physical assets
- A penalty fee for late loan repayment
Correct answer: The reduction of an existing shareholder's ownership percentage when new shares are issued
Equity dilution occurs when a company issues new shares, reducing the ownership percentage of existing shareholders.
Question 4: What is a cap table?
- A pricing guide for product categories
- A spreadsheet showing the ownership stakes of all shareholders in a company (Correct answer)
- A financial summary for tax purposes
- A table of operating costs by department
Correct answer: A spreadsheet showing the ownership stakes of all shareholders in a company
A capitalization table (cap table) lists all securities a company has issued and shows the ownership percentage of each shareholder.
Question 5: What is a term sheet?
- A binding contract finalizing an investment deal
- A non-binding document outlining the key terms of a proposed investment (Correct answer)
- A legal filing with the Securities and Exchange Commission
- A monthly financial summary sent to investors
Correct answer: A non-binding document outlining the key terms of a proposed investment
A term sheet is a non-binding agreement that summarizes the key financial and other terms of an investment offer before formal legal documents are drafted.
Question 6: What does 'due diligence' mean in startup funding?
- The legal process of registering a business name
- An investor's thorough investigation of a startup before committing capital (Correct answer)
- A required annual audit for publicly traded companies
- The process of filing patents before launch
Correct answer: An investor's thorough investigation of a startup before committing capital
Due diligence is the comprehensive appraisal process investors undertake to verify a startup's financials, legal standing, team, and business claims before investing.
Entrepreneurship Funding and Finance 2
What is crowdfunding?