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

34 Pages Posted: 27 Jan 2001  

Thomas F. Hellmann

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

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.

Keywords: Venture Capital, security design, convertible securities

JEL Classification: G32

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: https://ssrn.com/abstract=257608 or http://dx.doi.org/10.2139/ssrn.257608

Thomas F. Hellmann (Contact Author)

University of Oxford - Said Business School ( 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

University of Oxford - Said Business School ( 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

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