Venture Capital Exit Rights

Control and Exit in Venture Capital Relationships

Joint Control and Redemption Rights in Venture Capital Contracts * Introduction

Often entrepreneurs and investors agree to governance mechanisms that resemble joint control – neither agent has dominant control of the firm, and corporate decisions unspecified in the initial contract are made only with the approval of both agents. This contradicts theoretical predictions that joint control is suboptimal, except under some limited circumstances. I develop a theoretical model ...

The allocation of control rights in venture capital contracts

Venture capitalists often hold extensive control rights over entrepreneurial companies, including the right to fire entrepreneurs. This paper 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 fo...

A pecking order of venture capital exits - What determines the optimal exit channel for venture capital backed ventures?

I develop a model of exits from venture capital backed companies based on moral hazard. The focus is on two alternatives: a trade sale and an IPO. The alternatives differ in their governance structure. The model shows that highly profitable companies that need few oversight will go public, while less profitable companies that require more control will be sold. This suggests that the common noti...

Research on the Allocation of Cash Flow Rights and Control Rights in Venture Capital Financing Contract

In view of the allocation of cash flow rights and control rights in venture capital firms, a financing contract model is set up by introducing the entrepreneur’s self-owned capital in this paper. This paper analyzes the affecting factors and mechanism to the allocation of cash flow rights and control rights, shows the relationship between cash flow rights and control rights, gives the bargain i...