Prof. Merritt Fox and Prof. Joseph A. McCahery
Promoting Innovation
Importance of IPO for Venture
Capitalist Exit
Black and Gilson thesis:
The optimal contract between the
entrepreneur and the venture
capitalist is structured around the
availability of the venture capitalist’s
exit through an IPO.
Double-sided Moral Hazard
Problem
Venture Capitalist
Uncertainty
Shirking
Value-added
Services
¥/$/€
Information
asymmetry
Renegotiation
Entrepreneur
Agency
Costs
Venture Capital Architecture
Selection
Phase
Entrepreneur
Entrepreneur
Operation
Phase
Exit Phase
Investor
Investor
Staged
Staged
Financing
Financing
Entrepreneur
Entrepreneur
Convertible
Convertible
Preferred
Preferred
Stock
Stock
Investor
Investor
2
Regain
Regain Control
Control
IPO
1
Exit
Exit
Investor
IPO Availability Explains National
Differences
z
IPO availability explains why innovation based
spin-offs occur in much greater numbers in the
United States than in Germany or Japan.
z
Theory: more “vibrant” public equity market in the
United States makes this optimal form of venture
capital contract more available in the United States
than elsewhere.
Further Required Steps toward
Better Finance for Innovation
z Flexible
Business Forms
z Corporate Governance and
Disclosure
z Tax Neutrality
z Entrepreneurism
Flexible Business Forms To Meet
Parties’ Contractual Needs
Venture Capitalist
Limited Liability
Partnership
*Agent
*Agent Constraints
Constraints Rules
Rules
*Affiliation
*Affiliation Terms-Entry
Terms-Entry
*Appointment
*Appointment Rights-Selection
Rights-Selection
*Decision
*Decision Rights-Initiation
Rights-Initiation
*Trusteeship
*Trusteeship
Limited Liability
Company
(Close) Corporation
Limited
Partnership
Entrepreneur
*Agent
*Agent Constraints
Constraints Standards
Standards
*Affiliation
*Affiliation Terms-Exit
Terms-Exit
*Appointment
*Appointment Rights-Removal
Rights-Removal
*Decision
*Decision Rights-Veto
Rights-Veto
*Reward
*Reward
Governance and Disclosure
z Vibrant
Equity Market for IPO Exit
Requires:
z Non-Control
Shareholder Protection
z Initial and Ongoing Corporate Disclosure
z Market Transparency
Tax
z Tax
Neutrality – US-Check-the-Box
z Corporate
vs. Partnership Taxation
Entrepreneurism
z Need
for Mobility:
z Employees
of Established Firms Leaving if
Good Ideas are not Implemented
z Creating
an Entrepreneurial Climate
Thank you!