Research on the Allocation of Cash Flow Rights and Control Rights in Venture Capital Financing Contract

Abstract

In view of the allocation of cash flow rights and control rights in venture capital firms, a financing contract model is set up by introducing the entrepreneur's self-owned capital in this paper. This paper analyzes the affecting factors and mechanisms to the allocation of cash flow rights and control rights, shows the relationship between cash flow rights and control rights, and gives the bargain intervals of the entrepreneur and the venture capitalist about the allocation of cash flow rights and control rights. It is shown that the more the entrepreneur's self-owned capital and the higher the venture capitalist's evaluation of the venture project and the ability of the entrepreneur, the fewer cash flow rights and control rights the venture capitalist will want; the relationship between cash flow rights and control rights of the venture capitalist is complementary but not corresponding, so the result provides a theoretical explanation for Kaplan and Stromberg's empirical researches about the disproportion between cash flow rights and control rights in venture capital firms.