Entrepreneurship Funding and Finance 1 — Questions and Answers
Question 1: What is venture capital?
- A government loan for small businesses
- Private equity investment in high-growth startups in exchange for equity (Correct answer)
- A type of business insurance
- A grant from a nonprofit organization
Correct answer: Private equity investment in high-growth startups in exchange for equity
Venture capital (VC) is financing provided by investors to high-potential startups in exchange for an equity stake and often board involvement.
Question 2: What is an angel investor?
- A government agency that funds small businesses
- A wealthy individual who provides capital to startups in early stages (Correct answer)
- A bank that specializes in startup loans
- A crowdfunding platform operator
Correct answer: A wealthy individual who provides capital to startups in early stages
Angel investors are high-net-worth individuals who invest their personal funds into early-stage companies, often providing mentorship alongside capital.
Question 3: What does equity financing mean?
- Borrowing money that must be repaid with interest
- Raising capital by selling ownership shares in a company (Correct answer)
- Leasing equipment rather than buying it
- Applying for a government small business grant
Correct answer: Raising capital by selling ownership shares in a company
Equity financing involves raising capital by selling a portion of ownership (shares) in the business to investors.
Question 4: What is a convertible note?
- A business check issued by a bank
- A short-term debt instrument that converts into equity at a future funding round (Correct answer)
- A legal document for trademark registration
- A performance review tool for employees
Correct answer: A short-term debt instrument that converts into equity at a future funding round
A convertible note is a debt instrument that automatically converts into equity—typically at a discount—when the startup raises a subsequent financing round.
Question 5: What is a SAFE (Simple Agreement for Future Equity)?
- A type of government-backed small business loan
- An investment contract that gives investors the right to future equity without debt terms (Correct answer)
- A standard accounting framework for startups
- A secure payment processing service
Correct answer: An investment contract that gives investors the right to future equity without debt terms
A SAFE is a financing instrument created by Y Combinator that gives investors the right to receive equity in a future round without accruing interest.
Question 6: What is the SBA's primary role for small business entrepreneurs?
- To invest directly in startups for equity
- To provide loan guarantees and resources that help small businesses access capital (Correct answer)
- To regulate stock markets for small-cap companies
- To collect taxes from self-employed individuals
Correct answer: To provide loan guarantees and resources that help small businesses access capital
The Small Business Administration (SBA) backs loans through partner lenders, reducing risk for banks and making capital more accessible to small businesses.
Entrepreneurship Funding and Finance 1
What is venture capital?