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Staged venture capital contracting with ratchets and liquidation rights
Author(s) -
Leisen Dietmar P.J.
Publication year - 2012
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2011.12.003
Subject(s) - venture capital , business , preference , finance , value (mathematics) , capital (architecture) , ratchet , monetary economics , economics , microeconomics , management , archaeology , machine learning , computer science , chaotic , history
This paper uses real options analysis to study later round financing in the presence of two standard venture capital contracting provisions: anti‐dilution (ratchet) and liquidation preference. We argue that such provisions can preclude financing of a positive NPV venture in the case of a large follow‐on financing relative to firm value. Liquidation preference contracting at multiples greater than one is not feasible in the later round if the financing is small relative to firm value. We highlight an interaction effect between the two provisions: increasing the liquidation multiple can help to avoid dilution and the need for the prior venture capitalist to waive ratchet provisions.