Conditional Allocation of Control Rights in Venture Capital Firms
22 Pages Posted: 17 Aug 2006
Date Written: July 2006
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.
Keywords: Corporate finance, venture capital, control rights, convertible securities
JEL Classification: D23, G24, G32
Suggested Citation: Suggested Citation
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