FlexiQuiz - QAI - Module #11 Quiz

1. What is the primary purpose of equity vesting agreements for founders?

To prevent the founders from leaving the company without their equity

To distribute equity equally among founders to minimize disputes

To provide immediate ownership of all equity to the founders

To align the interests of founders with the company's success

2. Syndicate Investor A (SIA) invested $250,000 into StartupX in the form of a SAFE with a valuation cap of $7 million and a floor conversion valuation of $3,000,000 ($7.50 per share). As part of the agreement, StartupX had to raise at least $2 million in a Qualified Round or the floor conversion would be triggered. StartupX failed to raise a qualified round, triggering the floor conversion. How many shares will SIA own following the conversion?

46,666

33,333

26,666

40,000

3. What is the purpose of "Floor Conversion" in a SAFE agreement?

It determines the minimum amount of funding required for conversion

It sets the minimum valuation for equity conversion

It establishes a discount on share prices for early investors

It safeguards investors from excessively high valuations

4. What does a shareholder agreement (buy-sell agreement) among founders typically include?

A clear plan for distributing founders' equity

Instructions for distributing dividends to shareholders

Provisions for selling shares to external investors

A requirement for equal equity ownership among founders

5. Why do startups often use convertible notes or SAFEs for early-stage fundraising?

To avoid legal and accounting expenses in a raise

To secure voting rights for investors

To set a fixed valuation for the company

To raise capital quickly without committing to a valuation

6. In the case of warrants, what gives the holder the right to purchase shares at a predetermined price?

Strike price

Valuation cap

Liquidation preference

Vesting period

7. What is one of the downsides of convertible notes and SAFEs for investors?

They provide investors with significant voting rights.

They are cost-effective for startups.

They require a fixed valuation of the company.

They may limit investors' ability to influence the company's direction.

8. Angel Investor A (AIA) invested $5000 in StartupX in exchange for a Safe Note with a $5MM Valuation Cap. A year later, StartupX raised a $2.5 million round at a pre-money valuation of $8 Million. The pre-money share price for the seed round was $10. What share price did AIA's investment convert into?

$6.25

$10.00

$5.00

$8.00

9. What happens to unvested equity if a founder leaves the company before the vesting period is over?

The unvested equity is transferred to the departing founder.

The unvested equity is divided among the remaining founders.

The unvested equity is returned to the company.

The unvested equity is converted into preferred stock.

10. Which event triggers the conversion of a SAFE into equity?

The company's acquisition by an institutional investor

Meeting certain conditions such as a minimum funding threshold

The investor's commitment to invest

The discount rate applied to share prices

11. What distinguishes Participating Preferred Shares from other types of preferred equity?

They offer a liquidation preference and a share of remaining profits

They are non-transferable to new shareholders

They have a fixed current dividend rate

They are typically used by mature companies to raise capital

12. Angel Investor A (AIA) invested $10,000 into StartupX and received a convertible note with a 25% discount. A year later, Startup X raised a $3 million seed round at post-money valuation of $10 million. What valuation will AIA's note convert into equity?

$7 million

$5.25 million

$10 million

$7.5 million

13. Why is it recommended for founders to agree on the issuance of equity from the beginning?

To simplify the company's capital structure

To avoid vesting agreements

To ensure equal ownership among founders

To prevent equity disputes in the future

14. Stock options are primarily granted to:

Common shareholders

Employees

Preferred shareholders

All answers are correct

15. Which type of equity provides a liquidation preference over common shares, ensuring shareholders are paid out first in case of a low or no harvest (Terminal Value)?

Preferred shares

Phantom shares

Warrants

Stock options

16. What does the term "Valuation Cap" in the context of SAFE agreements refer to?

The investor's commitment to invest

The discount rate applied to the share price

A price ceiling for equity conversion

The minimum amount of funding raised

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