Preplanned Exit Strategies in Venture Capital

37 Pages Posted: 26 Jul 2006 Last revised: 13 Oct 2008

See all articles by Douglas J. Cumming

Douglas J. Cumming

Florida Atlantic University

Sofia Johan

Florida Atlantic University - Finance; Tilburg Law and Economics Center (TILEC)

Abstract

This paper empirically considers the role of preplanned exits (the investor's initial strategy to sell the investee company via an acquisition or an IPO at the time of initial contract with the entrepreneur), legal conditions and investor versus investee bargaining power in the allocation of cash flow and control rights in entrepreneurial finance. We introduce a sample of 223 entrepreneurial investee firms financed by 35 venture capital funds in 11 continental European countries, and these data indicate the following. First, preplanned acquisition exits are associated with stronger investor veto and control rights, and a greater probability that convertible securities will be used, and a lower probability that common equity will be used; the converse is observed for preplanned IPOs. Second, investors take fewer control and veto rights and use common equity in countries of German legal origin, relative to Socialist, Scandinavian and French legal origin. Third, more experienced entrepreneurs are more likely to get financed with common equity and less likely to be financed with convertible preferred equity, while more experienced investors are more likely to use convertible preferred equity and less likely to use common equity.

Keywords: Preplanned Exit, Contracts, Governance, Control Rights, Bargaining Power, Law and Finance

JEL Classification: G24, G28, G31, G32, G35

Suggested Citation

Cumming, Douglas J. and Johan, Sofia A., Preplanned Exit Strategies in Venture Capital. European Economic Review 52 (2008) 1209¿1241. Available at SSRN: https://ssrn.com/abstract=918979

Douglas J. Cumming (Contact Author)

Florida Atlantic University ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

HOME PAGE: http://booksite.elsevier.com/9780124095373/

Sofia A. Johan

Florida Atlantic University - Finance ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

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