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Title: Conditional Allocation of Control Rights in Venture Capital Firms

Author(s): Georg Gebhardt and Klaus M. Schmidt

Publication Date: July 2006

Keyword(s): control rights, convertible securities, corporate finance and venture capital

Programme Area(s): Industrial Organization

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.

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Bibliographic Reference

Gebhardt, G and Schmidt, K. 2006. 'Conditional Allocation of Control Rights in Venture Capital Firms'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5758