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Conditional Allocation of Control Rights in Venture Capital Finance

Georg Gebhardt and Klaus Schmidt ()

Discussion Papers in Economics from University of Munich, Department of Economics

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: 2006-03
New Economics Papers: this item is included in nep-ent, nep-fin and nep-fmk
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Working Paper: Conditional Allocation of Control Rights in Venture Capital Finance (2006) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:lmu:muenec:909

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