Venture Capital Investment

Venture Capital Investment

Introduction

A kind of financial capital, venture capital is the high risk, high growth and high potential capital given to the early start up companies. Venture capital investment requires intense negotiations and private contracts between entrepreneurs and investors. In venture backed companies financial contracts contribute key part by coordinating the investment role between an entrepreneur and a venture capitalist (Kaplan & Stromberg, 2003).

In United States looting of a company by its executives or managers is a normal practice and considerable problem. In last decade it is has been clearly seen that Managers and CEOs of different companies engaged only in maximizing their own wealth. Managers and CEOs willingly misrepresented the figures of profits and costs and resulted in bankruptcies. They are only interested in getting compensations and incentives irrespective of what company earns. They have no interest in maximizing the company's profitability. Managers divert company's fund to their personal use (Lubin, J. 2010). This scenario have developed a big question for investors that how to cater this issue.

Remedial Actions

Contracts are said to be backbone of any financial transaction. Financial contracting may be described as what kind of deals made between deals between financiers and who needs finance. When Venture Capitalist may not possess the quality of doing business that is why he is needs a reliable entrepreneur who manages and run his business. But recent studies show that the entrepreneurs have intentionally made huge losses to companies for having their wealth maximized. This is why it is very important for venture capitalists to go into a contract that may protect him from having any future loss from his entrepreneur. Thorough that contract he may also define the terms of doing business which ultimately result in high returns and lower the risk of losses. When venture capitalists are going in financial contract with optimistic entrepreneurs they have to keep some clause or rights at their end to have a control on the managers.

Types of Securities

Preferred stocks are most typical form of the share issued in venture capital investments in United State of America. Preferred shares offers more benefits than any other option. These shares can be converted into common shares. Preferred stocks have preferences over commons shares in terms of liquidation and also in dividends. That is why these shares are called preferred stocks. These stocks have special voting rights which we discuss further in coming paragraphs. These shares also have anti dilution protection and mandatory or optional redemption schemes.

Voting rights

Venture capitalist may have a big influence on the company thorough voting right. Venture capitalist may use his voting right which he got through the number of shares he have in company. His rights may be defined as number of preferred shares he holds in company which are convertible into preferred stocks. He may heave then rights to choose beard of directors according to his or her will. Top management may have a fear that the board directors are appointed by venture capitalist and he may not try ...