Question

Critically evaluate the following statement: “Venture capital (VC) contracts are inherently unfair. The investors get special privileges, like anti-dilution protection or preferred shares, but the entrepreneurs do not. The only way of reaching a fair agreement would be to give these privileges to both the investor and entrepreneur, or else make the investor pay for these privileges. The fact that investors don’t give these privileges to the entrepreneurs proves that they don’t really care about creating great businesses. Besides, things like preferred shares give investors an incentive to sell the company, rather than taking it public.”

Answer 1

Venture capitalist are generally focused at obtaining a large amount of control in overall management of the company so they want to get a special privileges like anti-dilution protection or preference share but entrepreneur does not.

venture capitalist are generally concerned about protection of their own interest first and they do not care about the interest of the entrepreneur and intrapreneur are high risk individual so if they want to expand their business they are desperately giving out those rights and privileges to this venture capitalist so rather than providing those companies with highly expertised services and helping them in creation of great business, the venture capitalist are mostly focused on helping themselves by gaining more in the company and protection of their overall investment through privileged rights.

I do not agree with that that preference share will be giving investor the incentive to sell the company because the preference share is just mix of equity and debt capital and venture capitalist who are little bit conservative in nature wants to go through acquisition of preference share rather than common stock.