Venture Capital Meets Contract Theory: Risky Claims or Formal Control?

Please use this identifier to cite or link to this item: http://dspace.mediu.edu.my:8181/xmlui/handle/10261/1905

Title:	Venture Capital Meets Contract Theory: Risky Claims or Formal Control?
Keywords:	Venture Capital Control Rights Security Design Entrepreneurial Initiative
Description:	This paper develops a theory of the joint allocation of formal control and cash-flow rights in venture capital deals. We argue that when the need for investor support calls for very high-powered outside claims, entrepreneurs should optimally retain formal control in order to avoid excessive interference. Hence, we predict that risky claims should be be negatively correlated to control rights, both along the life of a start-up and across deals. This challenges the idea that risky claims should a ways be associated to more formal control, and is in line with contractual terms increasingly used in venture capital, in corporate venturing and in partnership deals between biotech start-ups and large drug companies. The paper provides a theoretical explanation to some puzzling evidence documented in Gompers (1997) and Kaplan and Stromberg (2000), namely the inclusion in venture capital contracts of contingencies that trigger both a reduction in VC control and the conversion! of her preferred stocks into common stocks. I acknowledge financial support from the TMR Network on “The Industrial Organization of Banking and Financial Markets in Europe”.
URI:	http://dspace.mediu.edu.my:8181/xmlui/handle/10261/1905
Other Identifiers:	http://hdl.handle.net/10261/1905
Appears in Collections:	Digital Csic

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