FlexiQuiz - QAI - Module #11 Quiz

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

They are cost-effective for startups.

They require a fixed valuation of the company.

They provide investors with significant voting rights.

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

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?

33,333

26,666

46,666

40,000

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

They are non-transferable to new shareholders

They have a fixed current dividend rate

They offer a liquidation preference and a share of remaining profits

They are typically used by mature companies to raise capital

4. 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?

$5.25 million

$10 million

$7 million

$7.5 million

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

It sets the minimum valuation for equity conversion

It establishes a discount on share prices for early investors

It determines the minimum amount of funding required for conversion

It safeguards investors from excessively high valuations

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

To secure voting rights for investors

To set a fixed valuation for the company

To avoid legal and accounting expenses in a raise

To raise capital quickly without committing to a valuation

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

To distribute equity equally among founders to minimize disputes

To provide immediate ownership of all equity to the founders

To prevent the founders from leaving the company without their equity

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

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

To avoid vesting agreements

To ensure equal ownership among founders

To simplify the company's capital structure

To prevent equity disputes in the future

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

The unvested equity is divided among the remaining founders.

The unvested equity is returned to the company.

The unvested equity is transferred to the departing founder.

The unvested equity is converted into preferred stock.

10. 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)?

Phantom shares

Warrants

Preferred shares

Stock options

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

The discount rate applied to the share price

A price ceiling for equity conversion

The investor's commitment to invest

The minimum amount of funding raised

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

Valuation cap

Liquidation preference

Strike price

Vesting period

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

Meeting certain conditions such as a minimum funding threshold

The investor's commitment to invest

The company's acquisition by an institutional investor

The discount rate applied to share prices

14. 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?

$10.00

$5.00

$6.25

$8.00

15. Stock options are primarily granted to:

Employees

Preferred shareholders

Common shareholders

All answers are correct

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

Instructions for distributing dividends to shareholders

Provisions for selling shares to external investors

A clear plan for distributing founders' equity

A requirement for equal equity ownership among founders

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