Same, Same but Different: How Preferential Claims Skew Returns of Venture Capital Investments

36 Pages Posted: 24 Apr 2019 Last revised: 19 Feb 2020

See all articles by Julian Kaboth

Julian Kaboth

HHL Leipzig Graduate School of Management

Arnd Lodowicks

affiliation not provided to SSRN

Maximilian Schreiter

Handelshochschule Leipzig (HHL)

Bernhard Schwetzler

HHL Leipzig Graduate School of Management - Department of Finance

Date Written: February 25, 2019

Abstract

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

Kaboth, Julian and Lodowicks, Arnd and Schreiter, Maximilian and Schwetzler, Bernhard, Same, Same but Different: How Preferential Claims Skew Returns of Venture Capital Investments (February 25, 2019). Available at SSRN: https://ssrn.com/abstract=3359787 or http://dx.doi.org/10.2139/ssrn.3359787

Julian Kaboth (Contact Author)

HHL Leipzig Graduate School of Management ( email )

Jahnallee 59
Leipzig, 04109

Arnd Lodowicks

affiliation not provided to SSRN

Maximilian Schreiter

Handelshochschule Leipzig (HHL) ( email )

Jahnallee 59
Leipzig, 04109
Germany

Bernhard Schwetzler

HHL Leipzig Graduate School of Management - Department of Finance ( email )

Jahnallee 59
D-04109 Leipzig
Germany
+49-341-9851-685 (Phone)
+49-341-9851-689 (Fax)

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