We examine the relationship between venture capital (VC) backing and the choice of payment in mergers and acquisitions. We find that VC-backed targets receive a significantly higher fraction of stock and a greater likelihood of all-stock offers than non-VC-backed targets, even after controlling for self-selection bias, differences between VC-backed and non-VC-backed targets, and VC bridge-building between targets and acquirers. VC-backed targets tend to hold more acquirer stock when the acquirer is young and small, risky, has large investments, and demands VC expertise. Independent VCs like private equity funds prefer stock payment, while corporate VCs are natural between the choice of stock and cash. We also document that the performance of acquirers improves positive in the short-term and long-term when VC-backed targets choose stock payment. Altogether, our results indicate that VCs strategically hold acquirer shares; especially, those who meet their investment interests, which eventually contribute to acquirers’ performance.

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