Convertible Securities and Venture Capital Finance

By Klaus M. Schmidt. Social Science Research Network, 2003

519 citations recorded by the source corpus.

This paper offers a new explanation for the prevalent use of convertible securities in venture capital finance. Convertible securities can be used to endogenously allocate cash flow rights as a function of the realized quality of the project. This property can be used to mitigate the double moral hazard problem between the entrepreneur and the venture capitalist. It is shown that an optimally designed convertible security outperforms any mixture of debt and equity and that it can induce both parties to invest efficiently. The result is robust to renegotiation and to changes in the timing of investments and information flows.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/ecedf52174de34156c0befe072585edfe425bf93

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Citations in the corpus

The Importance of Trust for Investment: Evidence from Venture Capital (2016, background): “[46] Schmidt, Klaus (2003) ’Convertible Securities and Venture Capital Finance,’ Journal of Finance, 58 (3), 1139—66.”
Investment, Duration, and Exit Strategies for Corporate and Independent Venture Capital‐Backed Start‐Ups (2015, unknown): “However, although the instrument variable used is good for the exit strategy, it is not applicable to the investment and duration strategies.(27) We use the following method to mitigate the concern regarding this omitted, correlated variable in the estimations of the investment and duration strategi”
An entrepreneur's choice of venture capitalist or angel-financing: A behavioral game-theoretic approach (2011, background): “2 For papers that analyze double-sided effort-shirking, see, for example, Houben (2003), Casamatta (2003), Schmidt (2003), Repullo and Suarez (2004), Casamatta and Haritchabalet (2004), Fairchild (2004), Cassiman and Ueda (2006), Bernile et al. (2007), and de Bettignies (2008).”
Financing entrepreneurship: Bank finance versus venture capital (2007, background): “For an elegant theoretical treatment of this topic, see for example Schmidt (2003).”
The Optimal Portfolio of Start-Up Firms in Venture Capital Finance (2000, background): “In developing a model of VC activity with double moral hazard, our analysis importantly draws on Repullo and Suarez (1999), Casamatta (1999), Schmidt (1999) and Strobel (2001).”
The Burden of the Nondiversifiable Risk of Entrepreneurship (2010, methodology): “Our model does not include these factors, however—we use standard preferences based on consumption levels alone.”
Contracts and Exits in Venture Capital Finance (2008, unknown): “…Yosha, 1997; Hellmann, 1998; Marx, 1998; Trester, 1998; Bergmann and Hege, 1998; Repullo and Suarez, 1998; Bascha and Walz, 2001a; Kirilenko, 2001; Schmidt, 2001; among others); (3) Research indicating the role of U.S. tax law in biasing the selected security in the U.S. towards convertible…”
How Does Venture Capital Financing Improve Efficiency in Private Firms? A Look Beneath the Surface (2011, unknown): “A prominent example of this literature is Spiegel and Tookes (2008). Their model predicts that firms will finance projects with the greatest revenue-generating ability privately (e.”
Venture Capital and Other Private Equity: A Survey (2011, unknown): “In contrast to Berglof’s focus on the allocation of control rights, (Schmidt 2003) argues that incentive properties of convertible securities — effort incentives for the entrepreneur and the VC — are crucial in explaining why they are almost always used in VC transactions while very rarely used by b”
Innovation And Venture Capital Exits (2004, unknown): “…capital contracting and control rights allocation, which typically focuses on agency con icts between entrepreneur and venture capitalist (Hellmann, 1998; Bergemann and Hege, 1998; Casamatta, 2003; 6 Cornelli and Yosha, 2003; Schmidt, 2003; Inderst and Müller, 2004; Repullo and Suarez, 2004).”