Venture Capitalists Reputation and the Decision to Invest in Different Types of Equity Securities
- Topics:
- Innovation
- Tags:
- Equity,
- Finance,
- Financing Startups,
- Investment,
- Social Science Electronic Publishing Inc.,
- Venture Capital
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Overview: This paper explains the empirical observation that venture capitalists invest in different types of equity securities such as convertible preferred stock or combinations of common stock and stock options. As the effort problem of the entrepreneur is likely to be distorted by reputation effects of the venture capitalist, we show that incentive compatible venture capital contracts should be optimally structured with convertible securities rather than with a combination of debt and equity. Furthermore we provide two explanations for the empirical fact that convertible preferred stock and convertible participating preferred stock are used far more often than a combination of common stock and stock options.
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Format: HTML | Date: Jan 2003 | Pages: 1
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