Conditional Allocation of Control Rights in Venture Capital Finance

Gebhardt, Georg and Schmidt, Klaus M. (March 2006): Conditional Allocation of Control Rights in Venture Capital Finance. Discussion Papers in Economics 2006-13

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: Economics; Economics > Munich Discussion Papers in Economics; Economics > Munich Discussion Papers in Economics > Micro-Economics; Economics > Munich Discussion Papers in Economics > Financial Markets; Economics > Munich Discussion Papers in Economics > Institutional Economics; Economics > Munich Discussion Papers in Economics > Game Theory; Economics > Chairs > Seminar for Economic Theory
• Subjects: 300 Social sciences > 300 Social sciences, sociology and anthropology; 300 Social sciences > 330 Economics
• JEL Classification: D23, G24, G32
• Language: English