IPOs, Acquisitions And The Use Of Convertible Securities In Venture Capital
- Topics:
- IPO
- Tags:
- Acquisition,
- Security,
- Mergers & Acquisitions,
- IPO,
- Investment,
- Financing Startups,
- Financial Services,
- Financial Planning,
- Finance,
- Venture Capital
- Source:
- Stanford University
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Overview: This paper provides a new explanation for the use of convertible securities in venture capital, which is based on the trade-off between acquisition and 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 (Initial Public Offerings). 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 also important for achieving efficient exit decisions.
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Format: PDF | Size: 964KB | Date: Jan 2004 | Pages: 52
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