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Private markets and pre-IPO investing: 45 questions and answers

The questions from the Private markets and pre-IPO investing course, each with the correct answer and a short explanation. Learn the topic step by step in the Unicorn Academy app.

1. Public markets and private markets

What is the most common price reference for the shares of a private company?

The price of the latest funding round Without an exchange there is no continuous price: the starting point is the price of the latest round.

Which obligation distinguishes a listed company from a private one?

Publishing financial statements and periodic information Listing brings public disclosure obligations that a private company does not have.

Why is selling shares of a private company harder?

Because there is no continuous market and the company's approval is often needed A sale is possible but requires a counterparty, time and often the company's consent.

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2. What a unicorn company is

When is a company called a unicorn?

When it is private and valued at more than one billion dollars Both conditions are required: an unlisted company and a valuation above one billion.

What is a decacorn?

A private company valued at more than 10 billion dollars Decacorn indicates a private valuation above 10 billion dollars.

How should the valuation of a private company be read?

As a number negotiated in a single transaction, to be read with its date and source It reflects one transaction on one date, not a continuous market.

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3. The life cycle of a startup

What do the first rounds, such as seed and Series A, normally finance?

A product that still has to prove itself The first rounds support young companies whose product and market are still to be tested.

What happens at each new round?

New capital comes in and the company receives a new valuation Each round brings fresh capital and sets a new reference valuation.

In which phase does pre-IPO investing sit?

In the late stage phase, before a possible listing or sale Pre-IPO concerns mature companies that are not yet listed.

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4. Venture capital, private equity and pre-IPO

What is the venture capital model based on?

On a few successful companies making up for the many that return nothing Venture accepts from the start that most investments will not pay back.

What do the PitchBook data as of 5 August 2021 quoted in the lesson show?

That the failure rate falls from 23.6% at Series A to 10.8% at Series E The failure rate drops at each later round, without ever reaching zero.

Does a lower failure rate mean the investment is risk-free?

No: entry price, illiquidity and uncertainty about the exit remain Fewer failures does not mean no possible loss for the investor.

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5. Why companies stay private longer

What allows many companies to postpone their listing?

The abundance of capital available in private markets With plenty of private capital available, growth can be financed without the stock exchange.

Which of these is an advantage for a company that stays private?

Fewer public disclosure obligations A private company has much lighter disclosure duties than a listed one.

What does this mean for investors?

An important part of the growth in value happens before the listing If the company lists late, much value is created while the shares are not on an exchange.

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6. Primary and secondary transactions

In a primary transaction, who receives the money?

The company, which issues new shares In a primary, capital enters the business in exchange for newly issued shares.

What characterises a secondary transaction?

An existing shareholder sells shares already issued In a secondary, existing shares change hands and the seller receives the money.

Is the price of a secondary transaction always equal to that of the latest round?

No, it is negotiated and can be lower or higher The secondary price depends on the negotiation and on demand at the time.

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7. Buying shares directly

What does the investor obtain with a direct purchase?

Shares registered in the investor's own name In a direct purchase the investor becomes a shareholder of the company.

What does the transfer normally need?

The approval of the company Almost all private companies make transfers subject to their own approval.

What is the main risk of a direct purchase?

Seeing the transfer blocked or postponed The company can refuse consent or exercise its right of first refusal, even late in the negotiation.

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8. The SPV, the dedicated vehicle

What does someone who invests through an SPV hold?

A share of the vehicle, which holds the shares The investor is a member of the vehicle, not a shareholder of the target company.

How many companies does an SPV normally contain?

Just one The SPV is built around a single investment, so it does not diversify.

What is worth checking before entering an SPV?

Fees, who exercises the vote and who decides the sale Costs and decision-making powers vary a great deal from one vehicle to another.

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9. Funds and diversification

What is the main advantage of a fund compared with an SPV?

It spreads the investment across several companies The fund diversifies, while the SPV concentrates everything on one company.

Who decides when to buy and when to sell in a fund?

The fund manager The investor delegates investment decisions to the manager.

Where does the main risk shift with a fund?

To the choice of manager and the effect of fees With a fund, what matters is the quality of the manager and how much costs weigh over time.

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10. Tender offers

Who normally sells in a tender offer?

Employees and early shareholders The tender offer serves to give liquidity to those who have held shares for a long time.

Why does a company organise a tender offer?

To give liquidity to employees and early shareholders without listing It is an organised secondary transaction: the money goes to the sellers, not to the company.

Who decides which investors can buy?

The company, which approves the buyers Access is limited to buyers chosen or approved by the company.

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11. Transfer restrictions and the right of first refusal

What does the right of first refusal, or ROFR, allow?

The company or the shareholders to buy the shares at the same price, in place of the buyer Whoever holds the right can step into the buyer's place on the same terms.

Where are transfer restrictions normally written?

In the articles of association and shareholder agreements They are contractual rules of the company, different in each case.

Does an agreement signed with the seller guarantee the purchase?

No: the required consents are needed and the right of first refusal can be exercised Without approval and a waiver of the right of first refusal the transfer is not completed.

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12. Share classes and liquidation preferences

Who usually holds preferred shares?

The investors in the funding rounds Preferred shares are issued in the rounds and carry additional rights for investors.

What does a liquidation preference establish?

Who is repaid first, and up to what amount, in a sale or liquidation It gives some shares priority in the distribution of the proceeds.

Why can the same valuation be worth different amounts to different shareholders?

Because share classes have different rights to the proceeds Preferences change how proceeds are split, especially if the sale price disappoints.

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13. How a private company is valued

What is the difference between pre-money and post-money?

Pre-money is the value before the new capital, post-money the value after Post-money equals pre-money plus the capital raised in the round.

Which of these sources is NOT a completed transaction?

A news report on negotiations in progress Rumours may not be confirmed and can change.

What is the asking price worth comparing with?

Revenue, growth and comparable listed companies The headline valuation should be set against fundamentals and comparables.

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14. Dilution

What is dilution?

The reduction in existing shareholders' percentage when new shares are issued More shares outstanding means a smaller percentage stake for those already there.

Is dilution always an economic loss?

No: if the round is at a higher valuation the stake can be worth more What matters is the value of the stake, not just the percentage.

What does reasoning on a fully diluted basis mean?

Counting all the shares that may come to exist, including options and convertible instruments Shares promised but not yet issued are included too.

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15. Who can invest

Who are private offerings normally reserved for?

Qualified, professional or accredited investors Access is limited to categories defined by each country's regulations.

What is the key notion in the United States?

Accredited investor In the United States the reference is the accredited investor.

What are these limits for?

To protect investors from products that are illiquid and hard to value They are protective rules, linked to the nature of these investments.

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