Conditional Allocation of Control Rights in Venture Capital Firms

Klaus Schmidt () and Georg Gebhardt

No 5758, CEPR Discussion Papers from Centre for Economic Policy Research

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 (search for similar items in EconPapers)
JEL-codes: D23 G24 G32 (search for similar items in EconPapers)
Date: 2006-07
New Economics Papers: this item is included in nep-cse, nep-ent and nep-fin
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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