Conditional Allocation of Control Rights in Venture Capital Finance

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

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.

• Item Type: Paper
• Keywords: Corporate Finance, Venture Capital, Control Rights, Convertible Securities
• Faculties: Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems; Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > A4 - Unvollständige Verträge, Marktinteraktion und soziale Vergleichsprozesse; Economics; Economics > Chairs > Seminar for Economic Theory
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: D23, G24, G32
• Language: English