Same, Same but Different: How Preferential Claims Skew Returns of Venture Capital Investments
36 Pages Posted: 24 Apr 2019 Last revised: 19 Feb 2020
Date Written: February 25, 2019
Venture capital often involves complex equity contracts, which affect the allocation of cash flows among shareholdings at an exit liquidation. To facilitate economic impact analysis, we structure exit relevant preferential rights by their economic impact in a two-dimensional framework. Based hereon, we provide a model that allows to assess ex-ante value of such shares. We apply our model to a selected sample of ventures and find an average overvaluation on a share class basis of 22.1% (median 23.9%), where overvaluation is particularly severe for common and early-on investments.
Keywords: venture capital finance, liquidation preferences, preferential claims, option-pricing
JEL Classification: G12, G32
Suggested Citation: Suggested Citation