9th Symposium on
Finance, Banking, and Insurance
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Andreas Bascha* and
Uwe Walz** |
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*University of
Tübingen |
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We develop a
theoretical framework which enables us to analyze the
interaction between exit decisions and contract design in
venture capital finance. One of the main characteristics
of venture capital funds is that they are closed-end.
This requires that the relationship between the venture
capitalist and the entrepreneur has to end some point in
time. However, in many cases the venture capitalist and
the entrepreneur have diverging interests with respect to
different exit solutions (e.g. initial public offerings
or trade sales). In order to avoid serious efficiency
losses, it is crucial to adopt an instrument which solves
this problem in an ex-ante agreed contract. We show that
with convertible securities, an ex-ante agreed optimal
exit policy can be implemented. We therefore provide a
theoretical explanation for the wide-spread use of
convertible securities in venture capital finance. |
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