Renegotiation of Cash Flow Rights in the Sale of VC-Backed Firms

30 Pages Posted: 12 Jan 2007 Last revised: 29 Jul 2011

See all articles by Brian J. Broughman

Brian J. Broughman

Vanderbilt University Law School

Jesse M. Fried

Harvard Law School; European Corporate Governance Institute (ECGI)

Date Written: June 23, 2008


Incomplete contracting theory suggests that VC cash flow rights - including liquidation preferences - may be subject to renegotiation. Using a hand-collected dataset of sales of Silicon Valley firms, we find common shareholders do sometimes receive payment before VCs' liquidation preferences are satisfied. However, such deviations tend to be small. We also find that renegotiation is more likely when governance arrangements, including the firm's choice of corporate law, give common shareholders power to impede the sale. Our study provides support for incomplete contracting theory, improves understanding of VC exits, and suggests that choice of corporate law matters in private firms.

Keywords: Venture capital, preferred stock, liquidation preferences, corporate governance, incomplete contracting

JEL Classification: G24, G32, G33, G34, K12, K20, K22, M13

Suggested Citation

Broughman, Brian J. and Fried, Jesse M., Renegotiation of Cash Flow Rights in the Sale of VC-Backed Firms (June 23, 2008). Journal of Financial Economics (JFE), Vol. 95, pp. 384-399, 2010, UC Berkeley Public Law Research Paper No. 956243, Available at SSRN: or

Brian J. Broughman

Vanderbilt University Law School ( email )

131 21st Avenue South
Nashville, TN 37203-1181
United States

Jesse M. Fried (Contact Author)

Harvard Law School ( email )

1575 Massachusetts
Griswold Hall 506
Cambridge, MA 02138
United States
617-384-8158 (Phone)


European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
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1000 Brussels

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