Convertible Securities and Venture Capital Finance

Klaus Schmidt ()

No 2317, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper offers a new explanation for the prevalent use of convertible securities in venture capital finance. Convertible securities can be used to endogenously allocate cash flow rights as a function of the realized quality of the project. This property can be used to mitigate the double moral hazard problem between the entrepreneur and the venture capitalist. It is shown that an optimally designed convertible security outperforms any mixture of debt and equity and that it can induce both parties to invest efficiently. The result is robust to renegotiation and to changes in the timing of investments and information flows.

Keywords: Convertible Securities; Corporate Finance; Double Moral Hazard Problem; Incomplete Contracts; Venture Capital (search for similar items in EconPapers)
JEL-codes: D23 G24 G32 (search for similar items in EconPapers)
Date: 1999-12
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Citations: View citations in EconPapers (29)

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Related works:
Journal Article: Convertible Securities and Venture Capital Finance (2003)
Working Paper: Convertible Securities and Venture Capital Finance (2003)
Working Paper: Convertible Securities and Venture Capital Finance (1999)
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