IPOs, acquisitions, and the use of convertible securities in venture capital
Abstract
This paper provides a new explanation for the use of convertible securities in venture capital, which is based on the trade-off between acquisition or IPOs. A key property of convertible preferred equity is that it allocates different cash flow rights, depending on whether exit occurs by acquisition or IPO. The paper builds a model with double moral hazard, where both the entrepreneur and the venture capitalist provide value-adding effort. The optimal contract gives the venture capitalist more cash flow rights in acquisitions than IPOs. This explains the use of convertible preferred equity, including automatic conversion at IPO. Contingent control rights are shown to be instrumental for achieving effcient exit decisions. The model also explains when to use simple versus participating convertible preferred equity.(This abstract was borrowed from another version of this item.)
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Bibliographic Info
Article provided by Elsevier in its journal Journal of Financial Economics.
Volume (Year): 81 (2006)
Issue (Month): 3 (September)
Pages: 649-679
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Web page: http://www.elsevier.com/locate/inca/505576
Related research
Keywords:Other versions of this item:
- Hellmann, Thomas F., 2002. "IPOs, Acquisitions and the Use of Convertible Securities in Venture Capital," Research Papers 1702r, Stanford University, Graduate School of Business.
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