DP5758 Conditional Allocation of Control Rights in Venture Capital Firms
|Author(s):||Georg Gebhardt, Klaus M. Schmidt|
|Publication Date:||July 2006|
|Keyword(s):||control rights, convertible securities, corporate finance, venture capital|
|JEL(s):||D23, G24, G32|
|Programme Areas:||Industrial Organization|
|Link to this Page:||www.cepr.org/active/publications/discussion_papers/dp.php?dpno=5758|
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.