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http://ssrn.com/abstract=7249
 
 

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The Allocation of Control Rights in Venture Capital Contracts


Thomas F. Hellmann


Saïd Business School, University of Oxford ; University of British Columbia (UBC) - Sauder School of Business

Undated

Stanford GSB Research Paper No. 1362
Sauder School of Business Working Paper

Abstract:     
Venture Capitalists hold extensive control rights over entrepreneurial companies, including the right to fire the entrepreneurs with little severance. I examine why, and under what circumstances, entrepreneurs would voluntarily choose to relinquish control. I show that control may be necessary for the venture capitalists to have incentives to add value to their companies. Entrepreneurs may give up control and risk being replaced, even if the loss of private benefits under replacement outweighs the monetary benefits to the company. The model is also used to explain further stylized facts about governance and financial structure in venture capital contracts. It explains the use of redeemable convertible preferred shares, and why venture capitalists do not provide long-term finance, but rather provide a sequence of short-term financing rounds. Finally it examines why venture capitalists decided on the timing of an IPO, even if they have an incentive to "grandstand."

JEL Classification: G24, G32, G34, L14, M13

working papers series





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Date posted: March 4, 1996  

Suggested Citation

Hellmann, Thomas F., The Allocation of Control Rights in Venture Capital Contracts (Undated). Stanford GSB Research Paper No. 1362; Sauder School of Business Working Paper. Available at SSRN: http://ssrn.com/abstract=7249

Contact Information

Thomas F. Hellmann (Contact Author)
Saïd Business School, University of Oxford ( email )
Park End Street
Oxford, OX1 1HP
Great Britain
+44 (0)1865 288937 (Phone)
HOME PAGE: http://www.sbs.ox.ac.uk/community/people/thomas-hellmann
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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