Stage Financing and the Role of Convertible Securities

49 Pages Posted: 21 Apr 2003

See all articles by Francesca Cornelli

Francesca Cornelli

London Business School; Centre for Economic Policy Research (CEPR)

Oved Yosha

Tel Aviv University - The Eitan Berglas School of Economics (Deceased)

Abstract

Venture capital financing is characterized by extensive use of convertible securities and stage financing. In a model where a venture capitalist provides staged financing for a project, we illustrate an advantage of convertible debt (or warrants) over a mixture of debt and equity. Essentially, when the venture capitalist retains the option to abandon the project, the entrepreneur has an incentive to engage in window dressing and bias positively the short-term performance of the project, reducing the probability that it will be liquidated. An appropriately designed convertible security prevents such behavior because window dressing also increases the probability that the venture capitalist will exercise the conversion option becoming the owner of a substantial fraction of the project's equity.

JEL Classification: D82, G24, G32

Suggested Citation

Cornelli, Francesca and Yosha, Oved, Stage Financing and the Role of Convertible Securities. Available at SSRN: https://ssrn.com/abstract=322460 or http://dx.doi.org/10.2139/ssrn.322460

Francesca Cornelli (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
+44 20 7262 5050 x3225 (Phone)
+44 20 7724 3317 (Fax)

HOME PAGE: http://www.lbs.ac.uk/faculty/fcornelli/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Oved Yosha

Tel Aviv University - The Eitan Berglas School of Economics (Deceased)

N/A

Register to save articles to
your library

Register

Paper statistics

Downloads
413
Abstract Views
1,821
rank
69,546
PlumX Metrics