The Exit Structure of Venture Capital

43 Pages Posted: 8 Dec 2005  

D. Gordon Smith

Brigham Young University - J. Reuben Clark Law School

Abstract

Venture capital contracts contain extensive provisions regulating exit by the venture capitalists. In this Article, Professor Smith employs financial contracting theory in conjunction with original data collected from 367 venture-backed companies to analyze these exit provisions. He concludes that the combination of exit provisions in a typical venture capital relationship serves to lock venture capitalists into the investment during the initial stage. In later stages of the relationship, the venture capitalists acquire increasing control over exit by securing additional seats on the board of directors and by obtaining contractual exit rights. The result is a sophisticated transfer of control from the entrepreneur to the venture capitalists as financial investments increase.

Suggested Citation

Smith, D. Gordon, The Exit Structure of Venture Capital. UCLA Law Review, Vol. 53, p. 315, 2005; Univ. of Wisconsin Legal Studies Research Paper No. 1005. Available at SSRN: https://ssrn.com/abstract=272231 or http://dx.doi.org/10.2139/ssrn.272231

D. Gordon Smith (Contact Author)

Brigham Young University - J. Reuben Clark Law School ( email )

422 JRCB
Provo, UT 84602
United States
801.422.3233 (Phone)
801.422.0390 (Fax)

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