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Going Public and the Option Value of Convertible Securities in Venture Capital

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Author Info

  • Hellmann, Thomas F.

    (Stanford U)

Abstract

This paper considers potential disagreements between an entrepreneur and a venture capitalist about the desirability of taking a company public. Convertible securities are shown to be optimal for a novel reason. In particular, it is shown that automatic conversion at the time of the IPO takes away the option value of the convertible security. This provides an optimal incentive for the venture capitalist not to push the company too hard (or too early) into going public. The paper also derives the optimality of demand registration rights.

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File URL: http://gsbapps.stanford.edu/researchpapers/library/RP1703.pdf
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Bibliographic Info

Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number 1703.

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Date of creation: Nov 2000
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Handle: RePEc:ecl:stabus:1703

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References

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  1. Rafael Repullo & Javier Suarez, 2004. "Venture Capital Finance: A Security Design Approach," Review of Finance, Springer, vol. 8(1), pages 75-108.
  2. Bergemann, Dirk & Hege, Ulrich, 1997. "Venture Capital Financing, Moral Hazard and Learning," CEPR Discussion Papers 1738, C.E.P.R. Discussion Papers.
  3. Hellmann, Thomas F. & Puri, Manju, 2000. "Venture Capital and the Professionalization of Start-up Firms: Empirical Evidence," Research Papers 1661, Stanford University, Graduate School of Business.
  4. Kaplan, Steven & Strömberg, Per Johan, 2000. "Financial Contracting Theory Meets The Real World: An Empirical Analysis Of Venture Capital Contracts," CEPR Discussion Papers 2421, C.E.P.R. Discussion Papers.
  5. Leslie M. Marx, 1998. "Efficient venture capital financing combining debt and equity," Review of Economic Design, Springer, vol. 3(4), pages 371-387.
  6. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
  7. Hellmann, Thomas, 2006. "IPOs, acquisitions, and the use of convertible securities in venture capital," Journal of Financial Economics, Elsevier, vol. 81(3), pages 649-679, September.
  8. Hellmann, Thomas & Puri, Manju, 2000. "The Interaction between Product Market and Financing Strategy: The Role of Venture Capital," Review of Financial Studies, Society for Financial Studies, vol. 13(4), pages 959-84.
  9. Gompers, Paul A., 1996. "Grandstanding in the venture capital industry," Journal of Financial Economics, Elsevier, vol. 42(1), pages 133-156, September.
  10. Lerner, Joshua, 1994. "Venture capitalists and the decision to go public," Journal of Financial Economics, Elsevier, vol. 35(3), pages 293-316, June.
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Cited by:
  1. John Armour, 2002. "Law, Innovation and Finance: A Review," ESRC Centre for Business Research - Working Papers wp243, ESRC Centre for Business Research.
  2. Schwienbacher, Armin, 2007. "A theoretical analysis of optimal financing strategies for different types of capital-constrained entrepreneurs," Journal of Business Venturing, Elsevier, vol. 22(6), pages 753-781, November.

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