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Joint Control and Redemption Rights in Venture Capital Contracts

Vijay Yerramilli

University of Houston, C. T. Bauer College of Business

December 2006

In most venture capital financed firms, neither the venture capitalist nor the entrepreneur has exclusive authority over some of the key corporate decisions. For example: the decision whether the firm should undertake an IPO or be sold to a larger rival usually requires the approval of both the entrepreneur and the venture capitalist. This contradicts a strong prediction in the theoretical literature that joint control is suboptimal, except under some limited circumstances. In this paper, I show that when the conflict of interest between the entrepreneur and the venture capitalist over the exit decision is very severe, assigning control jointly to both the agents, and specifying a harsh penalty (such as liquidation) if they fail to reach an agreement may strictly dominate assigning control exclusively to one of the agents. A key factor is the firm's financial slack -- the difference between its expected cash flows and the required investments and monitoring costs. My results provide empirically testable predictions on the impact of firm characteristics and venture capitalist's characteristics on the contract between the entrepreneur and the venture capitalist, and the consequent impact on the timing and manner of the venture capitalist's exit from the firm.

Number of Pages in PDF File: 33

Keywords: Joint Control, Venture Capital, Exit Route

JEL Classification: G24, G30, G32

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Date posted: March 3, 2007  

Suggested Citation

Yerramilli, Vijay, Joint Control and Redemption Rights in Venture Capital Contracts (December 2006). Available at SSRN: http://ssrn.com/abstract=967323 or http://dx.doi.org/10.2139/ssrn.967323

Contact Information

Vijay Yerramilli (Contact Author)
University of Houston, C. T. Bauer College of Business ( email )
Houston, TX 77204
United States
713-743-2516 (Phone)
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