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Renegotiation of cash flow rights in the sale of VC-backed firms

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  • Broughman, Brian
  • Fried, Jesse
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    Abstract

    Incomplete contracting theory suggests that venture capitalist (VC) cash flow rights, including liquidation preferences, could be subject to renegotiation. Using a hand-collected data set of sales of Silicon Valley firms, we find common shareholders do sometimes receive payment before VCs' liquidation preferences are satisfied. However, such deviations from VCs' cash flow rights 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 more 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.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 95 (2010)
    Issue (Month): 3 (March)
    Pages: 384-399

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    Handle: RePEc:eee:jfinec:v:95:y:2010:i:3:p:384-399

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Venture capital Preferred stock Liquidation preferences Corporate governance Incomplete contracting;

    References

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    Cited by:
    1. Broughman, Brian J. & Fried, Jesse M., 2012. "Do VCs use inside rounds to dilute founders? Some evidence from Silicon Valley," Journal of Corporate Finance, Elsevier, vol. 18(5), pages 1104-1120.
    2. Da Rin, M. & Hellmann, T. & Puri, M.L., 2011. "A Survey of Venture Capital Research," Discussion Paper 2011-044, Tilburg University, Tilburg Law and Economic Center.
    3. Bengtsson, Ola & Sensoy, Berk A., 2011. "Investor abilities and financial contracting: Evidence from venture capital," Journal of Financial Intermediation, Elsevier, vol. 20(4), pages 477-502, October.

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