A Theory of Dismantling a Joint Ownership: The role of the Venture Capitalist in an IPO

When a firm goes public, the joint ownership of the firm is dismantled asynchronously, as venture capitalists are able to sell all of their shares soon after an IPO while the entrepreneur usually stays in the firm for a longer period. This paper captures this empirical fact by introducing a model of the IPO decision that explicitly considers the interaction of different block-holders of the firm at the time of an IPO. We focus on the case of a venture capitalist and a single entrepreneur. We find that in our model the privately optimal size of the IPO depends on the pre-IPO ownership structure. We characterize the nature of this dependence and perform an empirical analysis for the US IPO market for the period 1994-2005. The data confirm that the unsynchronized dismantlement of a joint venture affects the size of an IPO in a way consistent with our model. Our empirical results suggest that the decision of what fraction of the firm to sell is distorted in the direction generally favored by the venture capitalist. JEL codes: G32 G34 D23 L2