The Allocation of Control Rights in Venture Capital Contracts

Hellmann, Thomas (1998) The Allocation of Control Rights in Venture Capital Contracts. The Rand Journal of Economics, 29 (1). pp. 57-76.

Abstract

Venture capitalists often hold extensive control rights over entrepreneurial companies, including the right to fire entrepreneurs. This article examines why, and under what circumstances, entrepreneurs would voluntarily relinquish control. Control rights protect the venture capitalists from hold-up by the entrepreneurs. This provides the correct incentives for the venture capitalists to search for a superior management team. Wealth-constrained entrepreneurs may give up control even if the change in management imposes a greater loss of private benefit to them than a monetary gain to the company. The model also explains why entrepreneurs accept vesting of their stock and low severance.

Item Type: Article
Keywords: venture capital; entrepreneurship; finance
Subject(s): Finance
Date Deposited: 27 May 2015 13:45
Last Modified: 27 Feb 2017 10:37
Funders: N/A
URI: http://eureka.sbs.ox.ac.uk/id/eprint/5334

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