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Conditional Allocation of Control Rights in Venture Capital Firms


  • Gebhardt, Georg
  • Schmidt, Klaus M.


When a young entrepreneurial firm matures, it is often necessary to replace the founding entrepreneur by a professional manager. This replacement decision can be affected by the private benefits of control enjoyed by the entrepreneur which gives rise to a conflict of interest between the entrepreneur and the venture capitalist. We show that a combination of convertible securities and contingent control rights can be used to resolve this conflict efficiently. This contractual arrangement is frequently observed in venture capital finance.

Suggested Citation

  • Gebhardt, Georg & Schmidt, Klaus M., 2006. "Conditional Allocation of Control Rights in Venture Capital Firms," CEPR Discussion Papers 5758, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:5758

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    References listed on IDEAS

    1. Klaus M. Schmidt, 2003. "Convertible Securities and Venture Capital Finance," Journal of Finance, American Finance Association, vol. 58(3), pages 1139-1166, June.
    2. Rafael Repullo & Javier Suarez, 2004. "Venture Capital Finance: A Security Design Approach," Review of Finance, European Finance Association, vol. 8(1), pages 75-108.
    3. 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.
    4. Mayer, Colin & Schoors, Koen & Yafeh, Yishay, 2002. "Sources of Funds and Investment Activities of Venture Capital Funds: Evidence from Germany, Israel, Japan and the UK," CEPR Discussion Papers 3340, C.E.P.R. Discussion Papers.
    5. Hannan, Michael T & Burton, M Diane & Baron, James N, 1996. "Inertia and Change in the Early Years: Employment Relations in Young, High Technology Firms," Industrial and Corporate Change, Oxford University Press, vol. 5(2), pages 503-536.
    6. Steven N. Kaplan & Per Strömberg, 2003. "Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 281-315.
    7. Berglof, Erik, 1994. "A Control Theory of Venture Capital Finance," Journal of Law, Economics, and Organization, Oxford University Press, vol. 10(2), pages 247-267, October.
    8. Bascha, Andreas & Walz, Uwe, 2001. "Convertible securities and optimal exit decisions in venture capital finance," Journal of Corporate Finance, Elsevier, vol. 7(3), pages 285-306, September.
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    Cited by:

    1. Rin, Marco Da & Hellmann, Thomas & Puri, Manju, 2013. "A Survey of Venture Capital Research," Handbook of the Economics of Finance, Elsevier.

    More about this item


    control rights; convertible securities; corporate finance; venture capital;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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