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Initial Public Offerings and Pre-IPO Shareholders- Working Paper

Initial Public Offerings and Pre-IPO Shareholders- Working Paper

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Published by debgage
From University of NH Center For Venture Research
From University of NH Center For Venture Research

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Categories:Business/Law, Finance
Published by: debgage on Oct 17, 2009
Copyright:Attribution Non-commercial

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09/26/2010

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WORKING PAPER 1
INITIAL PUBLIC OFFERINGS AND PRE-IPO SHAREHOLDERS:ANGELS VERSUS VENTURE CAPITALISTS
 byWilliam C. Johnson and Jeffrey E. Sohl
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Johnson is an Assistant Professor of Finance at the Whittemore School of Business andEconomics, University of New Hampshire, Durham, NH 03824, Tel.: 603-862-3351, Fax: 603-862-4468, E-mail:william.johnson@unh.edu; Sohl is the Director of the Center for Venture Researchand Professor of Entrepreneurship and Decision Sciences at the Whittemore School of Business andEconomics, University of New Hampshire, Durham, NH 03824, Tel.: 603-862-3373, Fax: 603-862-4468, E-mail: jeff.sohl@unh.edu. We thank Laura Hill, Caitlin Brooke, Nina Curley, Kiryl Harris,Qinglan Huang, Vandana Laxmi, and David Nayes for their research assistance.
 
WORKING PAPER 2
INITIAL PUBLIC OFFERINGS AND PRE-IPO SHAREHOLDERS:ANGELS VERSUS VENTURE CAPITALISTS
Abstract
At the time of an initial public offering, shares in a firm are typically held by venture capitalists,insiders, corporate investors, and angel investors. We examine the role of angel investors in IPOfirms and find that they provide equity capital in industries that venture capitalists choose not toserve. Like venture-backed IPOs, we find that angel-backed IPO firms are younger than non-backedIPO firms. Shareholders in angel-backed IPO firms are more likely to sell their shares at the time of the offering. Finally, where venture-backed IPO firms have higher underpricing, angel-backed IPOfirms do not, implying that managers may prefer to obtain early stage financing from angelinvestors rather than other sources.
 
WORKING PAPER 3
Before conducting an initial public offering, the equity of a firm is held by a combination of investors including venture capitalists, managers of the firm, and angel investors (private individualinvestors). The literature has examined the influence of venture capitalist stock holdings andmanagement stock holdings on IPO firm valuation, underpricing, and long term performance andthe role of these investors in the initial public offering.
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Pre-IPO investors often have seats on the board of directors and should have considerable power in setting the offer price for the IPO firm(Lerner (1995)). As such, these investors will be able to make decisions that will ultimatelyinfluence the underpricing of the IPO firm, arguably the largest cost of the IPO to the firm going public. But there is one class of investor that has received almost no consideration in the empiricalIPO literature, the individual angel investor. This omission is particularly surprising when Sahlman(1990) and Sohl (2003) estimate the aggregate volume of angel investments to be ten times thenumber of venture capital investments and the finance literature has generally recognized thedeficiency of research in this area (Lerner (1998).
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The paper attempts to fill this void in theliterature, examining the role of angel investors in the process of bringing firms into the publicmarkets.Angel investors are important for several reasons. First, they often make investments instart-up firms at dollar amounts far smaller than one would tend to find for venture investors (Sohl,1999, 2007). Such early stage investments are likely to have a large influence not only on thesuccess of the firm, but also on its management, governance, and operations. Second, angelinvestors do not have the agency problems inherent in venture capital investments. Angels investtheir own money where venture capitalists are money managers and invest capital provided by their limited partners. This fundamentally changes the incentives of the venture capitalists. Pre-IPOinvestors are concerned about the liquidity provided to their investment by taking the firm publicand the return on their investment.
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Where angels are concerned most about the return of their 

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