The exaM consists of 20 multiple choice questions, 10 short answer questions, and an essay.
Short Answer and Essay word limit. Each short answer question must be answered in less than 100
words. The essay question must be answered in less than 2500 words.
Multiple Choice: Make the Best Selection Possible. Some of the multiple choice questions have multiple
answers that will sound good. Your job is to choose the best answer, not just one that is simply
Note on Jurisdiction: Questions asked in the exam all refer to the jurisdictions covered by the book and
lectures. Typically, this means the United States. For purposes of the exam, please answer only with
regard to the jurisdictions covered in class.
Clearly Mark Your Answers: Please make sure to clearly indicate your answers for each multiple choice
question. If there is any doubt, or your answer is unclear, you will not receive credit for that question.
1. When a VC says, I will put in $5 million based on ten pre-money, that is that same as saying:
a. I will invest $5 million and I want 25% of your company
b. I will invest $5 million based on fifteen post-money
c. I will invest $5 million and want half the company
d. None of the above
2. Which of the following entities provides the worst tax treatment for most company owners?
3. One potential benefit to employees when the company issues preferred stock is:
a. employees cannot be fired without cause for 90 days
b. employee stock options can be priced at a fraction of the preferred stock price
c. employees have an option to invest in that preferred stock
d. employees will become entitled to 15 sick days per year
4. Most American start-up companies choose to incorporate in the state of Delaware. Which of the
following describes one reason why?
a. Delaware is a small state, so the company gets more personal attention
b. Delaware has no corporate tax
c. Delaware allows a board structure that protects against unwanted takeovers
d. Courts in Delaware are notoriously favorable to shareholders
5. When an employee receives stock options, the options typically do not vest for:
a. three months
b. six months
c. nine months
d. one year
6. In drafting a liquidation clause in a venture capital negotiation, it is particularly important for
investor s counsel to make sure that:
a. The definition of liquidation includes a situation in which a company becomes insolvent or
b. The definition of liquidation includes a situation in which a company is acquired through
merger or acquisition.
c. All banks and secured creditors agree that the venture capital shareholder will have first rights
to proceeds of liquidations
d. All of the above3
7. Price-based anti-dilution protection is:
a. The most important issue to a smart venture capitalist
b. Never calculated using a formula
c. Triggered by a new round of investment at a lower per-share price
d. Too hard to understand
8. Recall our discussion of Amanda s business in class. Amanda s plan was to start:
a. A solar power company
b. A wind farm
c. A healthy fast-food restaurant
d. Coming to class more often
9. If a VC has a 1X liquidation preference with full participation,
a. The VC might convert to common stock in the event of an extremely profitable acquisition
b. The VC will never convert the stock to common stock during an acquisition
c. The VC will block most acquisition offers
d. None of the above
10. In the Representations and Warranties Section of a Stock Purchase Agreement, you would be most
likely to see which of the following:
a. A statement that the company promises to pay 6 percent dividends.
b. A statement that the transaction will not close until full payment is received.
c. A statement that the company owns its intellectual property.
d. A statement that La Trobe is the best university in the world.
11. A start-up company that desires to raise quick money would be best advised to pursue an
a. A Venture Capital firm
b. Angel Investors
c. A family member or friend
d. None of the above4
12. Although start-up companies typically have a hard time borrowing funds from banks and other
lending institutions, it is sometimes possible to:
a. Use borrowed money to develop intellectual property
b. Use borrowed money to buy property such as office furniture and computers
c. Use borrowed money to pay reasonable legal fees
d. Use borrowed money to take clients out to nightclubs
13. A contract says: Consent of the holders of a majority of the outstanding Preferred Stock shall be
required in the event of a proposed change of control (including merger or acquisition) of the company.
This is an example of:
a. A liquidation preference
b. A protective provision
c. A representation and warranty
d. A negative covenant
14. When a company founder is issued stock:
a. she must contribute something to the company
b. she should file a form 83(b), if the stock is fully vested
c. she cannot sell it for 75 days
d. all of the above
15. When drafting a non-competition agreement for key employees, it is best to:
a. Cover as wide a geographic area as possible, such as an entire country or continent
b. Cover as long a time period as possible, such as ten (10) years or more
c. Include a blue-lining clause, which asks a court to enforce the provision to the greatest extent
d. None of the above are recommended
16. The McDonalds golden arches (pictured) are an example of a:
d. Trade Secret5
17. As the instructor discussed in class, US venture capitalists have said to his American students, if you
don t have a ____ strategy, don t come to us for investment.
c. Intellectual Property
18. Suppose an investor in a company s Series A preferred stock negotiates the right to hold two board
seats. Over time, the company grows. The investor refuses to give up the board seats, which hurts the
company s continuing fundraising efforts. How could this have been solved from the beginning?
a. by suing the investors for punitive damages
b. by including a liquidation preference in the voting agreement
c. by including a protective provision in the stock purchase agreement
d. by including a sunset clause in the voting agreement
19. The business judgment rule:
a. Makes it easier for plaintiffs to recover against corporate officers and directors
b. Makes it harder for plaintiffs to recover against corporate officers and directors
c. Is not applicable to start-up companies
d. Requires that VCs continue to invest in future financing rounds
20. A trade secret can consist of:
d. all of the above6
Short Answer Questions. Please answer each of the following questions using less than 100 words per
question. I will not give credit to any answers that exceed 100 words.
21. How does one start a partnership?
22. In which type of business entity do venture capitalists typically invest (e.g. LLC, partnership,
corporation, sole proprietorship)? Why?
23. How can employers fire/terminate employees in the United States?
24. In what two situations do venture capitalists typically stand to make the most money?
25. Which stock option would an employee prefer to receive: an Incentive Stock Option (ISO) or a
Nonqualified Stock Option (NSO)? Why?
26. When is price-based anti-dilution protection triggered and how does it work?
27. Why does the duty of care protect directors even when they make decisions that seem stupid in
28. What types of behavior does the duty of loyalty prohibit?
29. Venture Capital investors often require a founder to make already-owned stock subject to
repurchase in the event that the founder is fired or leaves the company voluntarily. Explain this
concept and how it works.
30. What are trademarks and how do you establish them in the USA?7
Essay. Limit 2,500 Words.
Thelma s Tacos, Inc. (Thelma s) is a private company that has achieved recent success in the
restaurant industry. Thelma s is planning to raise $10 million by issuing preferred stock to Food
Ventures LLC (Food Ventures), a venture capital company, in a Series B round of financing.
Thelma s lawyer, Bob Robson, a recent law school graduate (though not from this university),
represents the company in negotiating the financing transaction. As Bob works with counsel for Food
Ventures, Abigail Adams, a few unresolved topics arise. The first topic relates to the investors
liquidation preference. The parties have agreed to a 2X liquidation preference, but have yet to agree on
whether it is participating preferred. Abigail says to Bob: Look, Bob. I don t think my client will agree
to this deal if we don t have full participation. Maybe they ll agree to a cap, if it s high enough, but I
doubt it. Abigail next tells Bob that they need to decide on whether the definition of liquidation
includes mergers, consolidations, or any other business combination. Bob has no idea what Abigail
means when she says cap, or what a liquidation has to do with a merger, and tries to change the
Attempting to move the conversation in a new direction with which he feels more comfortable, Bob
says: That s interesting, Abigail. But what about the existing preferred stockholders? Are you worried
about violating their rights? As Bob says this, Abigail realizes that she indeed forgot to check two
provisions: first, the protective provisions of the Series A holders, and second, the preemptive rights of
the Series A holders. She asks Bob if he can check the protective provisions to see if consents are
needed. Bob replies hopefully, Protective provisions, oh right. Protection is always good. He thinks to
himself that he really needs to figure out what protective provisions are. Abigail then checks the
company s Certificate of Incorporation to see whether there are preemptive rights for Series A holders.
The document says:
RIGHT TO MAINTAIN PROPORTIONATE OWNERSHIP:
EACH HOLDER OF SERIES A PREFERRED SHALL HAVE A RIGHT TO MAINTAIN PROPORTIONATE
OWNERSHIP IF SUCH A RIGHT IS PROVIDED BY LAW. 8
Before the meeting ends, Bob says, You know, Abigail, thank you so much for agreeing to give my
clients anti-dilution protection. It s really great that every time the company issues more stock, like in
the Series C and D rounds that will take place in the next couple of years, my client gets to maintain its
ownership percentage. I don t know why you are being so kind to us, but I really do appreciate it.
Abigail smiles coyly and replies, No, Bob. I m the one who is thankful that I get to work with you.
Still beaming, Bob packs up his briefcase and shakes Abigail s hand. He says, Great work, Abigail.
We re going to get this deal done”I m sure of it¦ I m going to start drafting the registration statement
so we can file it with the Securities and Exchange Commission as soon as possible. Registration is such a
time consuming process, so I d like to start early.
You are working as a Special Legal Consultant. Realizing that he has taken on a project he can t
handle, Bob engages you to help advise him regarding all unresolved issues implicated by the facts
above. Please explain to Bob what he needs to know about the issues implicated above, and how you
recommend that he resolve them.