Martin, John D.
[Verfasser:in]
;
Anshuman, V. Ravi
[Sonstige Person, Familie und Körperschaft];
Titman, Sheridan
[Sonstige Person, Familie und Körperschaft]
An Entrepreneur's Guide to Understanding the Cost of Venture Capital
Anmerkungen:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments March 30, 2012 erstellt
Beschreibung:
Entrepreneurs who deal with a venture capital firm (VC) for the first time often find themselves unprepared for the experience. The financing terms (deal structure), which specify the percentage of the firm's common stock that goes to the VC often require that the entrepreneur forfeit a large proportion of the firm's equity to the VC. The resulting ownership share is important but it is not the only determinant of the cash distribution rights conferred on the venture capitalist. Specifically, the entrepreneur often grants the VC control rights (the right to fill board seats, voting privileges of a common stockholder even though the VC holds preferred stock or debt, etc.) as well as liquidation rights (the right to be repaid before the common stockholders in the event of the sale or liquidation of the firm) that are not conveyed to the holders of common stock. Consequently, to fully understand the financing terms offered by the VC, the entrepreneur must not only account for cash flow rights, but must also incorporate consideration for control rights and liquidation rights. In this paper we attempt to explain why VCs seek very high rates of return that are so out of line with the returns required of established firms. Our explanation hinges on differences of opinion between an overly optimistic entrepreneur and a less sanguine VC