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Gebhardt, Georg and Schmidt, Klaus M. (February 2006): Conditional Allocation of Control Rights in Venture Capital Finance. SFB/TR 15 Discussion Paper No. 102
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Abstract

When a young entrepreneurial firm matures, it is often necessary to replace the founding entrepreneur by a professional manager. This replacement decision can be affected by the private benefits of control enjoyed by the entrepreneur which gives rise to a conflict of interest between the entrepreneur and the venture capitalist. We show that a combination of convertible securities and contingent control rights can be used to resolve this conflict efficiently. This contractual arrangement is frequently observed in venture capital finance.