Valuation and Control in Venture Finance


  • Andrei A. Kirilenko

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    • International Monetary Fund. I thank Michael Barclay, Matthias Kahl, George Kanatas, Josh Lerner, Leslie Marx, René Stulz, the editor, an anonymous referee, and seminar participants at the FOURTH Maryland Finance Symposium (2000), the 2000 Journal of Financial Intermediation Symposium at Boston College, 1999 Financial Management Association meetings, 1998 Northern Finance Association meetings, and Simon Business School of the University of Rochester for helpful suggestions. The views expressed in the paper are my own and do not necessarily constitute an official position of the International Monetary Fund. I remain responsible for all errors.


This paper presents the model of a relationship between a venture capitalist and an entrepreneur engaged in the formation of a new firm. I assume that the entrepreneur derives private nonpecuniary benefits from having some control over the firm. I show that to separate the entrepreneur's value of control from the firm's expected payoff, the venture capitalist demands disproportionately higher control rights than the size of his equity investment. The entrepreneur is compensated for a greater loss of control through better terms of financing, ability to extract higher rents from asymmetric information, and improved risk sharing.