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Convertible securities and venture capital finance

Author

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  • Yaron Leitner

Abstract

Venture capital financing relies heavily on convertible securities; the most common type is convertible preferred stock. Venture capital contracts also specify control rights that describe who gets to make the firm's decisions. The recent literature has provided some theoretical explanations for the use of these two features. Underlying these explanations is the idea that individuals can take actions that affect the firm's performance but that these actions cannot be specified in a contract. In this article, Yaron Leitner focuses on venture capital contracts, but the ideas presented can be applied to other contracting problems in which individuals must be given incentives to take appropriate actions.

Suggested Citation

  • Yaron Leitner, 2009. "Convertible securities and venture capital finance," Business Review, Federal Reserve Bank of Philadelphia, issue Q3, pages 18-27.
    • Handle: RePEc:fip:fedpbr:y:2009:i:q3:p:18-27
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    File URL: https://www.philadelphiafed.org/-/media/frbp/assets/economy/articles/business-review/2009/q3/brq309_convertable-securities.pdf
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    References listed on IDEAS

    as
    1. Catherine Casamatta, 2003. "Financing and Advising: Optimal Financial Contracts with Venture Capitalists," Journal of Finance, American Finance Association, vol. 58(5), pages 2059-2085, October.
    2. repec:bla:jfinan:v:58:y:2003:i:5:p:2059-2086 is not listed on IDEAS
    3. Hellmann, Thomas, 2006. "IPOs, acquisitions, and the use of convertible securities in venture capital," Journal of Financial Economics, Elsevier, vol. 81(3), pages 649-679, September.
    4. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
    Full references (including those not matched with items on IDEAS)

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