Research On Asymmetric Allocation Of Residual Claims And Control Rights In VC-backed Firms

VC-backed firm's ownership allocation has attracted much attention from academic and industrial fields due to extraordinary contribution they brought forward to emergence and development of new products,new industries and advancement of economy and society.The author analyzes VC-backed firms' ownership allocation phenomena between entrepreneurs and venture capitalists and finds that there are two distinguished features which are different from views held by mainstream theories:(1)Residual claim distribution between entrepreneurs and venture capitalists is far from symmetric with that of capital or physical asset contributed by the two parties.Entrepreneurs always gain more residual claim over the share of capital or physical asset they offered,venture capitalists,in contrary,gain less residual claim over the share of capital they offered. (2)Distribution of control rights between entrepreneurs and venture capitalists is not symmetric with that of residual claim:venture capitalists always gain more control rights compared with residual claim they gain.In order to explain the above phenomena,the author first analyzes foundations of theories and views on ownership allocation and finds that different foundations arise from different standpoints on the nature of firm.Accordingly,this paper investigates into the nature of firm and thus advances factors in bargaining power over residual claims and control rights of business enterprise.Then the author illustrates the distribution process of residual claim and control rights between entrepreneurs and venture capitalists and analyzes contributions and risks brought forward by entrepreneurs and venture capitalists respectively.Finally,the paper constructs financing model of VC-backed firms and eventually explains the ownership distribution phenomena in such firms.The paper also gains following points:(1)Most literature which has been limited in mainstream firm theories such as Principal-Agent Theory and Incomplete Contract Theory regards venture capitalist as central contractor and regards entrepreneur as decision-maker who will adopt opportunistic actions such as adverse selection,moral hazard and holdup etc.,and thus this literature focuses on how to prohibit or weaken the entrepreneur's opportunistic activities.(2)The fundamental nature of the firm lies in creation of surplus,the contractual nature serves as a tool to fulfill the firm's function of creation of surplus.(3)As the firm's fundamental nature lies in creation of surplus, distribution of ownership should not only be a mechanism of prohibiting or weakening decision-maker's opportunistic activities.As to the bargaining power over allocation of residual claim,the firm's nature of creation of surplus implies that contribution to the surplus is the principal factor;exclusiveness and specificity of capital contributed by each party strengthen and weaken the owner's bargaining power respectively.As to the bargaining power over allocation of residual control rights,residual claim is the principal element;control over risk-maker is an important influential factor.(4) Entrepreneurs and venture capitalists bargain over residual claims and control rights in deal structuring phase,and information on factors that influence bargaining power over allocation of residual claims and control rights engenders from deal selection and investment selection phases.(5)The principal reason for VC-backed firms' asymmetric allocation between residual claim and capital or physical asset lies in that the main contributions provided by entrepreneurs are opportunity identification and decision making which is human capital instead of non-human capital functions.VC-backed firms' asymmetric allocation between control rights and residual claim owes to the asymmetric allocation of risk-makers and risk-bearers:the entrepreneurs are the main source of risk while the risk-bearers include not only entrepreneurs but also venture capitalists.