Work

The Allocation of Control Rights in Venture Capital Contracts

Year: 1998

Type: article

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.

Source: The RAND Journal of Economics

DOI: 10.2307/2555816

Author: Thomas Hellmann

Institution: Stanford University

Language: English

Topic: Private Equity and Venture Capital

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDGs: Decent work and economic growth, Peace, justice, and strong institutions

Open Access status: green

OpenAlex ID: W2079685316

FWCI: 24.26

Cites: 23

Cited by: 676

Related to: 9