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HBS Contracting and Control
Terms in this set (11)
1. Staging of capital infusions
2. Syndication of investment
3. Incentive compensation
4. Preferred and/or convertible securities
What are the 4 most common control mechanisms?
VC stages investments based on new information rather than giving the entrepreneur all of the money upfront
What are staged capital infusions?
1. Allows VC to monitor and maintain option to abandon the project
2. Keeps the owner on a tight leash
What are two reasons that staged capital infusions are beneficial?
Management and VC interests are not always perfectly aligned
Why might a VC stage his capital infusions?
Apple Computer and FedEx
What are two companies that received staged investments?
1. Reduces overall risk of fund performance due to diversification
2. Second opinion on due diligence
3. Partners may bring novel expertise
4. Better negotiating position for VCs
What are 4 benefits of syndication of VC Investments?
1. Provides better alignment of interests between mgmt. and investors
2. Increased chances of success by aligning interests
3. Vesting and performance stock grants are additional structural control employed by the VC to reduce conflict
What are three benefits of incentive compensation?
Preferred stock purchase agreement
contains conversion provisions, as well as other covenants, consent rights and restrictions that serve to limit detrimental behavior by founders/management; mechanisms essentially separate out the "allocation of control" from the allocation of "ownership"
from investor to entrepreneur
How does preferred stock shift risk of poor performance?
board control, redemption rights, limitations on debt, asset purchases/sales, change of control, issuance of stock
What are 6 provisions?
to overcome agency costs, minimize conflict and risk, and to help efficiently allocate resources
Why do VCs employ control mechanisms?
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