Conditional Allocation of Control Rights in Venture Capital Finance

20 Pages Posted: 30 Jun 2006

See all articles by Georg Gebhardt

Georg Gebhardt

Ludwig Maximilian University of Munich (LMU) - Seminar for Theoretical Economics

Klaus M. Schmidt

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Date Written: June 2006

Abstract

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

Gebhardt, Georg and Schmidt, Klaus M., Conditional Allocation of Control Rights in Venture Capital Finance (June 2006). Available at SSRN: https://ssrn.com/abstract=911527 or http://dx.doi.org/10.2139/ssrn.911527

Georg Gebhardt

Ludwig Maximilian University of Munich (LMU) - Seminar for Theoretical Economics ( email )

Munich, 80539
Germany

Klaus M. Schmidt (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany
+49 89 2180 3405 (Phone)
+49 89 2180 3510 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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