Faculty of Economics and Business Administration Publications Database

Convertible Securities and Optimal Exit Decisions in Venture Capital Finance

Bascha, Andreas
Volume: 7
Number: 3
Pages: 285 - 306
Month: September
ISSN-Print: 0929-1199
Link External Source: Online Version
Year: 2001
Keywords: Venture capital; Convertible securities; Exit decisions
Abstract: We study the interaction between exitdecisions and contract design in venturecapitalfinance. One of the main characteristics of venturecapital funds is that they need to divest their holdings in the portfolio firms after a limited period of time. However, venture capitalists and entrepreneurs often have diverging interests with respect to different exit solutions (e.g., IPOs or trade sales). We show that with convertiblesecurities, the ex-ante agreed optimalexit policy can be implemented. Thereby, we give an explanation for the widespread use of convertiblesecurities in venturecapitalfinance.