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The allocation of control rights in venture capital contracts



By

Thomas Hellmann





Venture capitalists often hold extensive control rights over entrepreneurial companies, including the right

to fire entrepreneu. This paper examines why, and under what circumstances, entrepreneu would

voluntarily relinquish control. Control rights protect the venture capitalists from hold-up by the

entrepreneu. This provides the correct incentives for the venture capitalists to search for a superior

management team. Wealth-constrained entrepreneu may give up control even if the change in

management imposes a greater loss of private benefit to them than a monetary gain to the company. The

model also explains why entrepreneu accept vesting of their stock and low severance.