By: Brian Broughman

Thanks for both of your comments. As academics we rely on and greatly appreciate advice from the people actually doing VC deals. I agree with the concern that 2003 and 2004 may have unusual years for the sale of VC-backed firms, with many firms sold underwater as a result of depressed valuations. I don’t think, however, that the time period should change the nature of the relationship, though we may observe more carveouts as a result of the time period.
I also wanted to point out that we distinguish between carveout payments targeted at management and carveout payments awarded to common stockholders as a class. In the study we only measure carveout payments to common stockholders, not payments used to incentivize management. Our reason for this distinction is that we wanted to study the relationship between preferred and common stockholders, and focus on common stock’s holdup power. The incentives of management and common stockholders, while overlapping in many instances, are not exactly the same. The VCs and the acquiring firm may need to award some payment to management or other key employees to keep everyone motivated and get the deal done. Common stockholders are being cashed out in the sale and there is generally less reason to keep them motivated. The other reason we focus on carveouts to common stockholders as a class is that it was much easier for us to measure than payments to management, which can be structured in numerous ways. Thanks for the comments.
-Brian