Contract and Asset Values in Venture Capital Financings

18 Pages Posted: 15 Mar 2009 Last revised: 23 Oct 2009

See all articles by Dietmar Leisen

Dietmar Leisen

Johannes Gutenberg University Mainz - Department of Banking

Date Written: October 22, 2009

Abstract

In venture capital financings a venture capitalist buys some fraction of a company, for a stated amount of money, through preferred shares. It is common practice in empirical and theoretical analyses to infer from this transaction a value for the entire company, which we call the contract value. Owners do not hold shares with the same rights and so the contract value misrepresents the company value of all assets (asset value). This paper studies a stylized venture capital market, calculates the ratio of contract to asset value, and derives the expected returns both at the level of venture capital funds and at the company level. We study quantitatively the impact on econometric analyses and show that incorporating preference rights may help explain puzzling evidence.

Keywords: venture capital, preference rights, expected returns

Suggested Citation

Leisen, Dietmar P. J., Contract and Asset Values in Venture Capital Financings (October 22, 2009). Available at SSRN: https://ssrn.com/abstract=1359208 or http://dx.doi.org/10.2139/ssrn.1359208

Dietmar P. J. Leisen (Contact Author)

Johannes Gutenberg University Mainz - Department of Banking ( email )

Jakob-Welder-Weg 9
Mainz, D-55099
Germany
++49-6131-39 22097 (Phone)
++49-6131-39 23971 (Fax)

HOME PAGE: http://www.finserv.bwl.uni-mainz.de/index_ENG.php

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