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http://ssrn.com/abstract=257608
 
 

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IPOs, Acquisitions and the Use of Convertible Securities in Venture Capital


Thomas F. Hellmann


University of British Columbia (UBC) - Sauder School of Business


Sauder School of Business Working Paper

Abstract:     
This paper provides a new explanation for the use of convertible preferred equity in venture capital. It explains that the key feature of the convertible security is to create different cash flow rights for acquisitions and IPOs. It shows how the convertible security implements an optimal trade-off between the need to allocate cash flows to the venture capitalist and the desire to make efficient exit decisions. This approach also explains some puzzling contract features, such as automatic conversion in case of an IPO, or the use of participating preferred equity, where conversion never benefits the investors.

Number of Pages in PDF File: 34

Keywords: Venture Capital, security design, convertible securities

JEL Classification: G32

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Date posted: January 27, 2001  

Suggested Citation

Hellmann, Thomas F., IPOs, Acquisitions and the Use of Convertible Securities in Venture Capital. Sauder School of Business Working Paper. Available at SSRN: http://ssrn.com/abstract=257608 or http://dx.doi.org/10.2139/ssrn.257608

Contact Information

Thomas F. Hellmann (Contact Author)
University of British Columbia (UBC) - Sauder School of Business ( email )
2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8476 (Phone)
604-822-8477 (Fax)
HOME PAGE: http://strategy.sauder.ubc.ca/hellmann
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