Thursday, December 8, 2005


Prof. Gordon Smith from my alma mata
has an interesting research paper on the exit structure of venture capital:

My latest paper -- The Exit Structure of Venture Capital -- is now available for download on SSRN. This is the first paper based on my study of 367 venture-backed firms. Although informed by empirical data, this paper is mostly descriptive and theoretical. Another paper with a more detailed examination of the provisions is in the works.

In my view, the most important contribution of this current paper is its discussion of the board composition proposals. (See Parts I.D and I.E of the paper.) The most cited study of venture capital terms to date was done by Steven Kaplan and Per Str├Âmberg. Steven N. Kaplan & Per Str├Âmberg, Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts, 70 REV. ECON. STUD. 281 (2003). In that study, they describe board composition provisions in which the common stockholders and preferred stockholders must "mutually agree" to elect tie-breaking directors. This finding provided the foundation for Bill Bratton's intriguing paper. William W. Bratton, Venture Capital on the Downside: Preferred Stock and Corporate Control, 100 MICH. L. REV. 891 (2002).

Although I found such "mutual agreement" provisions in my sample, they were rare. Only 2.60% of the board composition provisions in my study include the language of "mutual agreement." Instead, most of the board composition provisions required common stockholders and preferred stockholders to vote together as a single class on tie-breaking directors. This is, of course, not the same as "mutual agreement," and I argue that this provison is part of contingent control transfer in the venture capital context.
(full post)

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