Participating Convertible Preferred Stock in Venture Capital Exits

52 Pages Posted: 13 Oct 2005 Last revised: 4 Oct 2013

See all articles by Sridhar Arcot

Sridhar Arcot

ESSEC Business School - Finance Department

Date Written: June 5, 2013

Abstract

This paper develops a theory of the participating convertible preferred (PCP) stock commonly used in venture capital settings. I show that the participation and convertibility features of PCP stock can be used to reduce information asymmetry between the venture and potential investors at the time of exit. Further, the convertibility feature of PCP helps in alleviating the problem of insufficient entrepreneurial effort. I then derive implications for the two most common types of exits in venture capital --- initial public offerings and trade sales --- and explain how US venture capital markets differ from other VC markets.

Keywords: Venture Capital Exits, Convertible Securities, IPOs and Trade Sale

JEL Classification: G24, G32

Suggested Citation

Arcot, Sridhar, Participating Convertible Preferred Stock in Venture Capital Exits (June 5, 2013). Journal of Business Venturing, Forthcoming, Available at SSRN: https://ssrn.com/abstract=819843 or http://dx.doi.org/10.2139/ssrn.819843

Sridhar Arcot (Contact Author)

ESSEC Business School - Finance Department ( email )

Avenue Bernard Hirsch
BP 105 Cergy Cedex, 95021
France

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