Capital structure in venture finance

Prior research has argued that convertible preferred equity is the optimal form of venture capital (VC) finance, based on datasets with up to 213 observations from the United States, where unique tax biases exist in favor of convertible preferred. This paper introduces a comparable sample of 3083 Canadian corporate and limited partnership venture financing transactions spanning the years 1991-2000. The data indicate that a variety of securities are used, and convertible preferred equity has not been the most frequent. Empirical tests offer strong support for the proposition that the mix of financing instruments minimizes the costs arising from a set of agency problems. (c) 2004 Elsevier B.V. All rights reserved.