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1、SecurityDesignCumming&Johan(2009,Chapter11)FormsofFinanceReviewofDifferentSecurityPropertiesTheConventionalWisdomDataExplanationsfortheDataSummaryDebt1stpriorityinbankruptcyStipulatedinterestpaymentsNon-paymentofinterest?canforcebankruptcyPreferredEquity2ndpriorityinbankruptcy
2、StipulatedpreferreddividendpaymentsNon-paymentofdividends?cannotforcebankruptcyFormsofFinance(Con’t)CommonEquityLastpriorityinbankruptcyDividendsmayormaynotbeforthcomingResidualclaimants?upsidepotential?capitalgains!WarrantsOptiontopurchasecommonequityLikeanAmericancalloptiont
3、opurchasethefirm(butdifferentbecauseincreases#securitieswhenexercised)ReviewofDifferentSecurityPropertiesTheConventionalWisdomDataExplanationsfortheDataSummaryFormsofFinance(Con’t)ConvertibledebtDebt+optiontoconvertfromdebttocommonequitySimilartodebt+warrantsConvertiblepreferr
4、edequityPreferredequity+optiontoconvertfrompreferredequitytocommonequitySimilartopreferredequity+warrantsReviewofDifferentSecurityPropertiesTheConventionalWisdomDataExplanationsfortheDataSummary5Figure2.1.PayoffFunctions$ValueofEntrepreneurialFirmPayofftoCommonEquityPayofftoDe
5、btPayofftoPreferredEquity45o45o45oPresentValueofInterest+PrincipalonDebtPresentValueofPre-SpecifiedPreferredDividendsSlopeis45ofor100%ofthecommonshares(45o*X/100forX%ofthecommonshares)TheConventionalWisdom“Convertiblepreferredequityisoptimal”Nothreatofbankruptcyforentrepreneur
6、ialfirm(contrasttodebt&interestpayments)PriorityfortheVCintheeventofbankruptcyUpsidepotentialfortheVCEntrepreneurwouldnotagreeunlesstrulycommittedtotheventure–mitigatesadverseselectionproblemsProvidesincentivesfortheVCtohelpthefirminbadtimes(VCaresidualclaimantinbankruptcy)Pri
7、cingofsecuritiesisrobusttoerrorsinfirmvaluationReviewofDifferentSecurityPropertiesTheConventionalWisdomDataExplanationsfortheDataSummaryTheConventionalWisdom(Con’t)“Convertiblepreferredequityisoptimal”Mitigates‘window-dressing’problemsinstagedfinancingarrangementsMitigates‘ris
8、k-shifting’problemsTermsofthecontractcanbeflexibleIncentivesf
