Renegotiation of cash flow rights in the sale of VC-backed firms
Incomplete contracting theory suggests that venture capitalist (VC) cash flow rights, including liquidation preferences, could be subject to renegotiation. Using a hand-collected data set of sales of Silicon Valley firms, we find common shareholders do sometimes receive payment before VCs' liquidation preferences are satisfied. However, such deviations from VCs' cash flow rights tend to be small. We also find that renegotiation is more likely when governance arrangements, including the firm's choice of corporate law, give common shareholders more power to impede the sale. Our study provides support for incomplete contracting theory, improves understanding of VC exits, and suggests that choice of corporate law matters in private firms.
Year of publication: |
2010
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Authors: | Broughman, Brian ; Fried, Jesse |
Published in: |
Journal of Financial Economics. - Elsevier, ISSN 0304-405X. - Vol. 95.2010, 3, p. 384-399
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Publisher: |
Elsevier |
Keywords: | Venture capital Preferred stock Liquidation preferences Corporate governance Incomplete contracting |
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