Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay

This Article identifies a cost to public investors of tying executive pay to the future value of a firm’s stock - even its long-term value. In particular, such an arrangement can incentivize executives to engage in share repurchases (when the current stock price is low) and equity issuances (when the current stock price is high) that reduce “aggregate shareholder value,” the amount of value flowing to all the firm’s shareholders over time. The Article also puts forward a mechanism that ties executive pay to aggregate shareholder value and thereby eliminates the identified distortions

Renegotiation of Cash Flow Rights in the Sale of VC-Backed Firms

Incomplete contracting theory suggests that VC cash flow rights - including liquidation preferences - may be subject to renegotiation. Using a hand-collected dataset of sales of Silicon Valley firms, we find common shareholders do sometimes receive payment before VCs\u27 liquidation preferences are satisfied. However, such deviations tend to be small. We also find that renegotiation is more likely when governance arrangements, including the firm\u27s choice of corporate law, give common shareholders power to impede the sale. Our study provides support for incomplete contracting theory, improves understanding of VC exits, and suggests that choice of corporate law matters in private firms

Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups

Venture capitalists (VCs) usually exit their investments in a startup via a trade sale. But the entrepreneurial team – the startup’s founder, other executives, and common shareholders – may resist a trade sale. Such resistance is likely to be particularly intense when the sale price is low relative to VCs’ liquidation preferences. Using a hand-collected dataset of Silicon Valley firms, we investigate how VCs overcome such resistance. We find, in our sample, that VCs give bribes (carrots) to the entrepreneurial team in 45% of trade sales; in these sales, carrots total an average of 9% of deal value. The overt use of coercive tools (sticks) occurs, but only rarely. Our study sheds light on important but underexplored aspects of corporate governance in VC-backed startups and the venture capital ecosystem

Renegotiation of Cash Flow Rights in the Sale of VC-Backed Firms

Incomplete contracting theory suggests that VC cash flow rights - including liquidation preferences - may be subject to renegotiation. Using a hand-collected dataset of sales of Silicon Valley firms, we find common shareholders do sometimes receive payment before VCs\u27 liquidation preferences are satisfied. However, such deviations tend to be small. We also find that renegotiation is more likely when governance arrangements, including the firm\u27s choice of corporate law, give common shareholders power to impede the sale. Our study provides support for incomplete contracting theory, improves understanding of VC exits, and suggests that choice of corporate law matters in private firms

Do VCs Use Inside Rounds to Dilute Founders? Some Evidence from Silicon Valley

In the bank-borrower setting, a firm\u27s existing lender may exploit its positional advantage to extract rents from the firm in subsequent financings. Analogously, a startup\u27s existing venture capital investors (VCs) may dilute the founder through a follow-on financing from these same VCs (an “inside” round) at an artificially low valuation. Using a hand-collected dataset of Silicon Valley startup firms, we find little evidence that VCs use inside rounds to dilute founders. Instead, our findings suggest that inside rounds are generally used as “backstop financing” for startups that cannot attract new money, and these rounds are conducted at relatively high valuations (perhaps to reduce litigation risk)

Managerial Power and Rent Extraction in the Design of Executive Compensation

This paper develops an account of the role and significance of managerial power and rent extraction in executive compensation. Under the optimal contracting approach to executive compensation, which has dominated academic re-search on the subject, pay arrangements are set by a board of directors that aims to maximize shareholder value. In contrast, the managerial power approach suggests that boards do not operate at arm's length in devising executive compensation arrangements; rather, executives have power to influence their own pay, and they use that power to extract rents. Furthermore, the desire to camouflage rent extraction might lead to the use of inefficient pay arrangements that provide suboptimal incentives and thereby hurt shareholder value. The authors show that the processes that produce compensation arrangements, and the various market forces and constraints that act on these processes, leave managers with considerable power to shape their own pay arrangements. Examining the large body of empirical work on executive compensation, the authors show that managerial power and the desire to camouflage rents can explain significant features of the executive compensation landscape, including ones that have long been viewed as puzzling or problematic from the optimal contracting perspective. The authors conclude that the role managerial power plays in the design of executive compensation is significant and should be taken into account in any examination of executive pay arrangements or of corporate governance generally.