if the portfolio company raises additional funding

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Unformatted text preview: nvertible preferred stocks is lowered to protect against dilution. Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 40 Characteristic (3): Covenants and Control Terms Entrepreneur wants to have control over the development of the business. Control is most important when the company is growing VC wants to insure high returns on the investments Control is most important when things are not going well The goal is to structure contracts as to allocate control to the party that has more benefits and expertise in using it. Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 41 Remark There are three types of control rights Voting Rights Board Representation Protective Provisions (some actions required approval of VC) Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 42 Voting Rights Preferred votes number of shares as if converted into common. Remark Normally, preferred stocks have no voting rights. Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 43 Characteristic (4): Employee Terms Compensate employees for taking risk and hard work Provide incentives to encourage superior performance Retain talent in the company Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 44 Characteristic (5): Staging of Capital Commitments (SCC) VCs fund companies in multiple “rounds” Seed stage, Start-up, Early stage, Expansion, etc. In the 1982-1990 period, the time between rounds was typically a year, with more dollars being committed in the later rounds. The rounds tend to be shorter in high-tech industries and for smaller sums. Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 45 The Dual Roles of SCC Control Mechanism Entrepreneur has to come back to VC for funding at several points. Option to abandon Allows investor to monitor the firm and to shut it down (i.e. not fund it) if the success probabilities are poor. Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 46 II.2.G. Economic Analysis of VC Contracts Corporate Finance, Tri Vi Dang, Col...
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