The Allocation of Control Rights in Venture Capital Contracts

Stanford GSB Research Paper No. 1362

Sauder School of Business Working Paper

Posted: 4 Mar 1996  

Thomas F. Hellmann

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

Multiple version iconThere are 2 versions of this paper

Date Written: Undated

Abstract

Venture Capitalists hold extensive control rights over entrepreneurial companies, including the right to fire the entrepreneurs with little severance. I examine why, and under what circumstances, entrepreneurs would voluntarily choose to relinquish control. I show that control may be necessary for the venture capitalists to have incentives to add value to their companies. Entrepreneurs may give up control and risk being replaced, even if the loss of private benefits under replacement outweighs the monetary benefits to the company. The model is also used to explain further stylized facts about governance and financial structure in venture capital contracts. It explains the use of redeemable convertible preferred shares, and why venture capitalists do not provide long-term finance, but rather provide a sequence of short-term financing rounds. Finally it examines why venture capitalists decided on the timing of an IPO, even if they have an incentive to "grandstand."

JEL Classification: G24, G32, G34, L14, M13

Suggested Citation

Hellmann, Thomas F., The Allocation of Control Rights in Venture Capital Contracts (Undated). Stanford GSB Research Paper No. 1362; Sauder School of Business Working Paper. Available at SSRN: https://ssrn.com/abstract=7249

Thomas F. Hellmann (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
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+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 )

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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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