IPOs, acquisitions, and the use of convertible securities in venture capital

Hellmann, Thomas (2006) IPOs, acquisitions, and the use of convertible securities in venture capital. Journal of Financial Economics, 81 (3). pp. 649-679.

Abstract

This paper provides a new explanation for the use of convertible securities in venture capital. A key property of convertible preferred equity is that it allocates different cash flow rights, depending on whether exit occurs by acquisition or IPO. 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.

Item Type: Article
Keywords: Venture capital; Convertible securities; IPO; Acquisition; finance
Subject(s): Finance
Date Deposited: 08 May 2015 14:40
Last Modified: 27 Feb 2017 10:39
Funders: N/A
URI: http://eureka.sbs.ox.ac.uk/id/eprint/5311

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