Deviations from Contractual Priority in the Sale of VC-Back Firms
The literature on venture capital contracting implicitly assumes that VCs' cash flow rights – including their liquidation preferences – are fully respected. Using a hand-collected dataset of Silicon Valley firms sold in 2003 and 2004, this paper is the first to document that common shareholders often receive payment before VCs' liquidation preferences are satisfied. We show these carveouts are larger when governance arrangements give common shareholders more power to impede the sale. Our study shows how VCs' control rights and cash flow rights interact to affect VCs' cash flow outcomes, and contributes to a better understanding of VC exits.