Corporate finance tri vi dang columbia university

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Unformatted text preview: umbia University, Fall 2013 47 Contracting Approach to Start-Up Finance (VC Contracting) Assumptions - Entrepreneur (E) and venture capitalist (VC) maximize their own objectives subject to binding contractual constraints. Objectives of parties - What does E care about and what is he maximizing? - What does VC care about and what is he maximizing? Alignment and Conflict of interests - Do E and VC have aligned objectives and interests? - What are potential conflicts of interests? Contractual Solutions - What are “optimal” deal terms to maximize joint surplus? Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 48 Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 49 Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 50 II.2.H. Empirical Studies of VC Contracts Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 51 Kaplan and Stromberg (2002) 213 VC investments in 119 portfolio companies by 14 VC firms. Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 52 Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 53 Cash flow rights = fraction of a portfolio company’s equity value that different investors and management have a claim to. Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 54 Remark After some period of time, this provision gives the VC the right to demand that the firm redeem the VC’s claim, typically at liquidation. This is very similar to the required repayment of principal at the maturity of a debt claim. Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 57 Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 58 Remark Automatic conversion provisions in which the security held by the VCs automatically converts into common stock under certain conditions. These conditions relate almost exclusively to an initial public offering (IPO) and require a minimum common stock price, an IPO stock price a median 3 times greater than the stock price of the financing round. Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 59 Anti-dilution protection protects the VC against future financing rounds at a lower valuation than the valuation of the current (protected) round. The entrepreneur’s shares can vest over time. This means that the company receives or can buy back any unvested shares for some low value if the entrepreneur leaves. The earlier the entrepreneur leaves, the more shares are unvested. VCs can require the entrepreneur to sign a non-compete contract that prohibits him from working for another firm in the same industry for some period of time if he leaves. Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 60...
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