Abstract
This note draws on an important paper in venture capital financing theory. BERGLOF (1994) stressed the important role of exit control and incorporated that issue in a model for optimal venture capital contract design. One major result of this work is that convertible debt strictly dominates all other financial contracts. Based on a consistent re-specification of the models' combined debt/equity-contract, we find that convertible debt as specified by Berglof does no longer strictly dominate all other financial contracts. Especially in situations where the expected synergies after a sale to an acquirer are large compared to the fringe benefits of the entrepreneur running the firm, a combination of debt and voting equity may dominate the convertible debt contract.
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