Conditional Allocation of Control Rights in Venture Capital Finance
20 Pages Posted: 30 Jun 2006
Date Written: June 2006
When a young entrepreneurial firm matures, it is often necessary to replace the founding entrepreneur by a professional manager. This replacement decision can be affected by the private benefits of control enjoyed by the entrepreneur which gives rise to a conflict of interest between the entrepreneur and the venture capitalist. We show that a combination of convertible securities and contingent control rights can be used to resolve this conflict efficiently. This contractual arrangement is frequently observed in venture capital finance.
Keywords: Corporate Finance, Venture Capital, Control Rights, Convertible Securities
JEL Classification: D23, G24, G32
Suggested Citation: Suggested Citation