Case

Security design

Prior research: convertible preffered equity is the optimal form. But this form is mainly valid for the US, where unique tax biass exist in favor of such instruments.

* provides stronger claim on liquidation value if default (risk shifting from VC to E)

* reduces E dilution of ownership

* raises greater amount of funds

* mitigates window dressing problems and ensures that NPV>0 gets financing

Cumming (2005) says that the mix of financing instruments is better for non-US firms as it minimizes the costs arising from agency problems:

* common equity – seed stage

* straight debt

* convertible debt

* convertible preffered equity

* mix of debt and equity

* straight preferred equity – seed stage

Staged financing

* several installments of the total amount of external equity financing over time that a start-up needs to cover investments and initial losses

* ties further payments of E to milestones that E has to reach before VC pays out the next installment (sales targets, stages of product development, acquisition of customers)

* gives VC a real option (failure – no financing or finance with less favorable terms; milestone is reached – negotiations of terms and conditions of the next round of financing regarding E stakes)

* VC reduces risks of bearing individual company risks

* For E it reduces the amount of external company risks that are shifted to VC and reduces cost of equity

* Limits opportunistic behavior by E

* Mitigates holds up problem when E threatens to leave and take all human capital

* Reduces qualification risks when E are not sufficiently qualified

* The more rounds of financing, the more required contracts and the higher the transaction costs of the deal for both

Tykvova

* E does not want to get VC financing in the start-u phase because E bargaining position is bad. E is afraid that VC can steal her ideas. When the bargaining positions improves...