Participating Convertible Preferred Stock in Venture Capital Exits
52 Pages Posted: 13 Oct 2005 Last revised: 4 Oct 2013
Date Written: June 5, 2013
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: Suggested Citation