An Approach on Convertible Securities, Control Right and Venture Capital Financing
Date Issued
2007
Date
2007
Author(s)
Chang, Shih-Chung
DOI
zh-TW
Abstract
This dissiteration is consist of two parts:part one is "The Role of Convertible Securities in Venture Capital Financing",and part two is "Control Right and Liquidity Demand for Star-up Firm".
In part one, we study the role of convertible securities
in the financing of start-up enterprises when the entrepreneurs are better informed than the venture capitalists (VCs).We demonstrate that for a well-designed contract the conversion ratio of the securities can be used as a signaling device to overcome the problem of information asymmetry If the variability of the return is sufficiently large, the entrepreneurs will find it desirable to rely on convertible securities with the conversion ratio revealing part of his information,
that is, a "separating equilibrium" will arise. Such an equilibrium has the advantage of avoiding the incentive constraints that appear in the other "pooling equilibrium",
in which the privately held information is not revealed.
We show that the time-lag of decisions between investment and conversion will also benefit the VCs, with the extra return as the "time value". In addition, we study the impact of introducing "technical shares" with which the entrepreneurs are awarded equity shares without investment outlays. We compare the different financing devices with convertible securities and explain why convertible securities have become the most commonly used financial instrument for start-up enterprises.
In part two, we show how optimal financing contract of convertible securities in star-up firm complements incentive schemes to discipline entrepreneur, and how the securities' return streams determine the VC's incentive to
intervene in management.The paper build a model to discuss the correlation of control right allocation and conversion decision. We also find that contingent control right is important for VC to achieve the investment efficiency.
Subjects
創投家
創業家
可轉換證券
訊息傳遞
控制權.
Venture capitalists
Entrepreneurs
Convertible securities
Signaling
Control right.
Type
thesis
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