Conditional Allocation of Control Rights in Venture Capital Finance

When a young entrepreneurial firm matures, it is often necessary to
replace the founding entrepreneur by a professional manager. This
replacement decision can be affected by the private benefits of
control enjoyed by the entrepreneur which gives rise to a conflict
of interest between the entrepreneur and the venture capitalist. We
show that a combination of convertible securities and contingent
control rights can be used to resolve this conflict efficiently.
This contractual arrangement is frequently observed in venture
capital finance.