Business Law 4350 Daniel Currie Chapter 4,5, and 7

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All of the following are items related to convertible promissory notes, except: a. Principal amount b. Maturity date c. Conversion terms d. Warrants

d. Warrants

All of the following are types of partnerships, except: a. Sole partnership b. General partnership c. Limited partnership d. Limited liability partnership

a. Sole partnership

NewCo is interested in raising up to $5 million in equity capital from an unlimited number of accredited and unaccredited purchasers during a 12-month period. NewCo understands that the offering will not be exempt under the blue sky laws of each applicable state. NewCo should participate in: a. A rule 504 offering b. An initial public offering c. A crowdfunded offering d. A Section 4(a)(2) offering

a. A rule 504 offering

A new business has been formed and anticipates raising equity investment from more than 100 investors, several of which will be venture capital funds. The business is not seeking pass-through taxation, will issue various classes of stock, and offer limited liability to all investors. The most suitable form of entity is a: a. C corporation b. S corporation c. Limited liability company d. General partnership

a. C corporation

John has started a company that will raise venture capital, and anticipates that ownership interests in the business will be widely held and will be provided to employees. The most suitable form of entity is a: a. C corporation b. S corporation c. Limited liability company d. Benefit corporation

a. C corporation

The governance of a corporation is in most cases determined by the: a. Domicile of the entity, e.g. the state in which it was incorporated b. Residence of the Board of Directors c. Residence of the CEO d. None of these are correct.

a. Domicile of the entity, e.g. the state in which it was incorporated

Robert is a venture capitalist and is deciding whether to invest in NewCo. Several key technologies developed by NewCo originated from its founders and they will be key to the company's future success. Robert is worried that some of the founders will leave the company shortly after incorporating. How can Robert minimize this risk: a. Impose vesting requirements on each of the founder's stock b. Issue common stock without vesting requirements c. Issue preferred shares without vesting requirements d. All of these are correct

a. Impose vesting requirements on each of the founder's stock

All of the following are true of self-financing, except: a. It is easy to make self-financing work b. It may not generate sufficient funds to cover salaries and other overhead expenses c. Customers may object to making advance payments d. Obtaining favorable credit terms is more difficult for a new enterprise

a. It is easy to make self-financing work

Unlike the founders and other employees, venture capital investors usually acquire: a. Preferred stock b. Treasury stock c. Convertible stock d. Common stock

a. Preferred stock

Investors in NewCo want to discourage outsiders from making offers to purchase shares in the company and ensure that they will retain equal percentage ownership rights if any of the current stockholders decide to sell their interest in the company. Which of the following techniques would best achieve these goals? a. Right of first refusal b. Repurchase rights c. Buy-sell agreement d. Co-sale agreement

a. Right of first refusal

A corporation is a distinct legal entity owned by: a. Shareholders b. At least two partners c. One person d. Members

a. Shareholders

The operating rules of the company, for example the rule stipulating the number of directors in the company, are set forth in a document called: a. The bylaws b. The articles of incorporation c. The corporate charter d. The operating agreement Hide Feedback

a. The bylaws

A partnership is a business carried on by a. Shareholders b. At least two partners c. One person d. Members

b. At least two partners

Once appointed, the ________ then usually adopts the bylaws, elects officers, authorizes the issuance of stock to the founders, establishes a bank account and authorizes payment of corporate expenses. a. CEO b. Board of directors c. CFO d. Promoter

b. Board of directors

Some businesses may be able to self-finance, or fund their growth through utilization of their own net income and cash resources. This is sometimes called: a. The elevator pitch b. Bootstrapping c. Leveraging d. Capitalizing

b. Bootstrapping

Most large business organizations operate as: a. Partnerships b. C corporations c. Limited liability companies d. Sole proprietorships

b. C corporations

The founders of Company X have the option to incorporate in either California or Delaware. One of the founders wants to exchange future services as consideration for stock in the company. Where should the founders incorporate? a. California b. Delaware c. Any state the founders choose d. All of these are correct

b. Delaware

To qualify for S corporation status, the entity must: a. Be a foreign corporation b. Have no more than 100 shareholders c. Have several classes of stock d. None of these are correct.

b. Have no more than 100 shareholders

Delaware is chosen by many companies as the state of formation because of the following, except: a. It has a favorable and well-developed body of corporate law b. It is less expensive relative to other states c. It can be advantageous from an administrative perspective d. It has a specialized and very experienced court system

b. It is less expensive relative to other states

John is the sole shareholder of a taxi cab company registered as an S corp. Which of the following would allow a court to potentially pierce the corporate veil and allow a creditor to reach John's personal assets to satisfy the corporation's liabilities: a. John properly capitalizes the corporation b. John co-mingles personal and corporate funds c. John conducts annual shareholder meetings and regular board meetings d. John makes sure corporate assets are never used for personal reasons

b. John co-mingles personal and corporate funds

Investors in NewCo want to have the ability to repurchase vested shares from employees who depart the company. Which of the following techniques would best achieve these goals? a. Right of first refusal b. Repurchase rights c. Buy-sell agreement d. Co-sale agreement

b. Repurchase rights

Susan and Martin are siblings starting a closely-held family business with less than 100 relatives who will be shareholders. They anticipate not needing to raise venture capital, will not provide equity incentives to employees, expect the business to be profitable and plan to distribute substantially all of its profits to the shareholders. The company will issue only one class of stock. The most suitable form of entity is a: a. C corporation b. S corporation c. General Partnership d. Limited Liability Company

b. S corporation

If a company has a class of equity securities (other than exempted securities) that is held of record by either 2,000 persons or 500 persons that are not accredited investors and has assets exceeding $10 million, then it will have to register its stock under: a. The Private Placement Act b. The Securities Exchange Act c. The Investment Company Act d. None of these are correct.

b. The Securities Exchange Act

John is able to structure contracts with customers that require payment upfront. This helps to finance the venture without any need for outside sources of capital. John has demonstrated an ability to: a. Leverage venture capital b. Obtain angel investment c. Bootstrap d. None of these are correct

c. Bootstrap

The owners of a small private family business want to incorporate and keep ownership strictly among family members in the event one of the family members wants to sell their stock. Which of the following techniques would best achieve these goals? a. Right of first refusal b. Repurchase agreement c. Buy-sell agreement d. Co-sale agreement

c. Buy-sell agreement

John and Sonny are co-owners of a private business and are looking at locations for the purpose of incorporating. They are both California residents and nearly all of the company's business is located in the state. Where should they choose to incorporate? a. Any state they deem best suited for this purpose b. Delaware c. California d. All of these are correct

c. California

If a company wishes to give all its investors the same rights and restrictions, the company should issue only: a. Preferred stock b. Treasury stock c. Common stock d. Convertible promissory notes

c. Common stock

Angela is an engineer who has a patent on a promising technology. She has been invited to join a startup whereby she will be given stock in exchange for transferring ownership of the patent to the startup. Angela is worried that the startup might not be successful. How can she limit the risk of transferring the patent to this startup? a. Condition the transfer until funding has been assured b. License the patent to the company with a right to terminate the license if the company fails c. Condition the transfer until funding has been assured and license the patent to the company with a right to terminate the license if the company fails d. None of these are correct

c. Condition the transfer until funding has been assured and license the patent to the company with a right to terminate the license if the company fails

Carlos is an investor considering an investment in NewCo. The risk of loss due to NewCo's bankruptcy is high and Carlos would like to mitigate this risk as much as possible in his investment. He would also like to participate in any upside by owning a portion of NewCo as it grows and becomes a safer investment. The best investment strategy for Carlos would be to make an investment in NewCo through: a. Common stock b. Preferred shares c. Convertible promissory notes d. None of these are correct

c. Convertible promissory notes

Anil wants to start a business involving a new but relatively simple product that can be produced in a short amount of time and with less than $100,000. His market research suggests that there would be widespread demand for the product. A favorable method to bootstrap the production costs would be to: a. Issue a private placement of equity securities b. Seek a commercial loan from a large bank c. Crowdfund production costs through pre-orders d. Issue bonds to wealthy private investors

c. Crowdfund production costs through pre-orders

Toby and Keith are planning to create and jointly own a company that will license their patented technology solely for royalties and will not create their own products for sale. Earnings would be distributed to these two owners, rather than retained to grow the business with the view toward selling it or taking it public. These investors want limited liability and do not anticipate raising capital from any other investors. The most suitable form of entity is a: a. C corporation. b. S corporation c. Limited liability company d. Limited partnership

c. Limited liability company

Kelly is starting a new biotechnology company that will operate at a loss for various years. The 100 + individual investors in this venture would like to benefit from the tax implications of these losses. They would also like limited liability and the ability to create various classes of stock. The most suitable form of entity is a: a. C corporation. b. S corporation. c. Limited liability company. d. General partnership.

c. Limited liability company.

Allison is interested in registering her new business as a corporation under the name Notary On the Go, Corp. She checks with the Secretary of State in her jurisdiction and obtains clearance to register her corporation under that name. Can Allison freely begin to market her notary services using the Notary on the Go name? a. Yes, since the Secretary of State registered her corporation under that name b. Yes, since it is a very distinctive name c. No, since others may already have prior use to that trademark d. None of these are correct

c. No, since others may already have prior use to that trademark

A sole proprietorship is a business owned by: a. Shareholders b. At least two partners c. One person d. Members

c. One person

Each of the following are hard questions that must be addressed to minimize future disputes when it comes time to formalize the relationship among the owners, except: a. Who will own what percentage of the business? b. Who will be in the position of control? c. Whether to file for patent protection? d. What happens if a founder quits?

c. Whether to file for patent protection?

NewCo is interested in raising $50 million in equity capital from an unlimited number of accredited investors during an unlimited time period. NewCo also wants to be exempt under the blue sky laws of each applicable state. NewCo should participate in: a. A rule 504 offering b. An initial public offering c. A crowdfunded offering d. A regulation D, rule 506 offering

d. A regulation D, rule 506 offering

NewCo is interested in raising $50 million in equity capital from an unlimited number of foreign investors. All the offers and sales will be made outside the U.S. through foreign brokerages and securities markets. NewCo should participate in: a. A rule 504 offering b. An initial public offering c. A crowdfunded offering d. A regulation S offering

d. A regulation S offering

Barbara and Phil are college students who have entered a business plan competition. To avoid a commercial dispute, they should consider an agreement that: a. States each student has a nonexclusive right to pursue a venture based on the plan b. Grants each other a nonexclusive right to use the information in the plan c. States how they will allocate any winnings if the plan wins the competition d. All of these are correct

d. All of these are correct

Mary is joining a startup as a minority owner and is being asked to sign a non-compete and non-disclosure agreement. Maria thinks it would be a good idea to ask for an employment agreement to: a. Protect herself against the whims of the other cofounders and investors b. Obtain cash through severance in the event of her dismissal c. Obtain additional stock vesting d. All of these are correct

d. All of these are correct

Tom is starting a consulting business as a C corporation and wants to register it as Nova Consulting and plans to market and brand the company's services under that same name. Which of the following would help to ensure proper use of the name? a. Checking the name availability at the Secretary of State in the states where the company is expected to do business b. Doing a trademark search c. Acquiring the Nova Consulting domain name d. All of these are correct

d. All of these are correct

A business plan should include: a. The nature of the company's business, markets and technology b. The qualifications of key members c. The financial goals of the venture d. All of these are correct.

d. All of these are correct.

A written partnership agreement can prevent future misunderstandings by: a. Including the term of the partnership's existence b. The division of profits and losses c. The duties of partners d. All of these are correct.

d. All of these are correct.

After selecting the form of organization best suited to the new business, the entrepreneur's next important step is to solidify the relationship among the founders by structuring the ownership of equity to: a. Protect the rights of each founder b. Provide incentives for hard work c. Divide the rewards fairly d. All of these are correct.

d. All of these are correct.

Although laws differ from state to state, the certificate of incorporation normally sets forth the following: a. The name of the corporation b. The business purpose of the corporation c. The authorized capital of the corporation d. All of these are correct.

d. All of these are correct.

Before making a final decision on which sources of funding to pursue, entrepreneurs should consider: a. The degree of control over the company they wish to retain b. How long it is likely to take before the company is cash-flow positive c. Whether the company would benefit from investor representation on the board of directors d. All of these are correct.

d. All of these are correct.

By carefully considering the forms of business entity and choosing the most appropriate one, entrepreneurs can: a. Reduce exposure to liabilities b. Minimize taxes c. Ensure the business is capable of being financed and conducted efficiently d. All of these are correct.

d. All of these are correct.

Entrepreneurs must often seek alternative funding sources, including: a. Self-financing b. The sale of stock c. Government financing programs d. All of these are correct.

d. All of these are correct.

Which of the following are disadvantages to "friends and family" financing: a. Friends and family often do not bring any expertise or strategic value to the company b. Friends and family are usually unable to invest significant amounts of money c. The risk the entrepreneur may harm important personal relationships d. All of these are correct.

d. All of these are correct.

Which of the following would comprise a material event that would affect the value of a company's stock? a. Receiving a term sheet for closing a financing b. Signing a major contract c. Experiencing significant growth in revenue d. All of these are correct.

d. All of these are correct.

Marcos needs capital to finance his startup. He cannot use his own funds and the company is not generating enough income to support itself. Suppliers and customers are unwilling to offer favorable terms at this point. Marcos has approached friends and family but they cannot provide enough capital for his company's current needs. Marcos would like any investment to involve minimal loss of control. He should seek investment from: a. Bootstrapping b. Venture capitalists c. Commercial banks d. Angel investors

d. Angel investors

A venture capitalist wants to participate in the sale of a shareholder's controlling interest in the event that shareholder decides to sell their stock. Which of the following techniques would best achieve these goals? a. Right of first refusal b. Repurchase agreement c. Buy-sell agreement d. Co-sale agreement

d. Co-sale agreement

The stock initially issued to the founders is almost always: a. Preferred stock b. Treasury stock c. Convertible stock d. Common stock

d. Common stock

All of the following are true of "friends and family" financing, except: a. It is often a relatively cheap and quick source of capital b. It is usually preferable when management wants to maintain control c. It can yield support based on personal relationships d. It often leads to friends and family seeking an active role in the business and board representation

d. It often leads to friends and family seeking an active role in the business and board representation

A new business has been formed and anticipates raising equity investment from more than 100 individual investors, none of whom are venture capital funds. The business is seeking pass-through taxation, various classes of stock, and limited liability to all investors. The most suitable form of entity is a: a. C corporation b. S corporation c. Benefit corporation d. Limited liability company

d. Limited liability company

Marsha is starting an accounting firm with several other accountants. She wants to obtain pass-through taxation, participate actively in the business and be limited in her liability for the misdeeds of the other accountants to extent of the business' assets. The State requires her to remain liable, however, for the full amount of any of her own misdeeds. The most suitable form of entity is a: a. C corporation b. S corporation c. Limited partnership d. Limited liability partnership

d. Limited liability partnership

Tim is considering an investment in New Corporation and would like to obtain additional rights, such as the right to elect a certain number of directors, to approve major corporate changes, and to receive priority of payment if the corporation is liquidated. Tim should negotiate for: a. Common stock b. Warrants c. Treasury stock d. Preferred stock

d. Preferred stock

Each of the following is a primary consideration in the choice of business entity, except: a. The degree to which the founders' personal assets are protected from liabilities of the business b. The availability of favorable tax strategies c. The desirability for potential investors and lenders d. The entrepreneur's lifestyle

d. The entrepreneur's lifestyle

Sarah's startup requires a significant amount of capital that will need to be financed through various stages of financing. She would benefit greatly from investors who can provide strategic value, mentoring and industry contacts and is willing to trade equity and control in exchange for the investment. Her company is projected to grow quickly and offer a 40% rate of return compounded annually and could be an attractive acquisition target by a larger company within 5 years. Sarah's business would be best suited to receive investment from: a. Friends and family b. Bootstrapping c. Angel investors d. Venture capital investors

d. Venture capital investors


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