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Venture Capital Contracts

Michael Ewens, Alexander S. Gorbenko and Arthur Korteweg

No 26115, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We estimate the impact of venture capital (VC) contract terms on startup outcomes and the split of value between the entrepreneur and investor, accounting for endogenous selection via a novel dynamic search and matching model. The estimation uses a new, large data set of first financing rounds of startup companies. Consistent with efficient contracting theories, there is an optimal equity split between agents, which maximizes the probability of success. However, VCs use their bargaining power to receive more investor-friendly terms compared to the contract that maximizes startup values. Better VCs still benefit the startup and the entrepreneur, due to their positive value creation. Counterfactuals show that reducing search frictions shifts the bargaining power to VCs and benefits them at the expense of entrepreneurs. The results show that selection of agents into deals is a first-order factor to take into account in studies of contracting.

JEL-codes: C78 D86 G24 (search for similar items in EconPapers)
Date: 2019-07
New Economics Papers: this item is included in nep-cfn, nep-cta, nep-ent and nep-eur
Note: CF PR
References: Add references at CitEc
Citations: View citations in EconPapers (9)

Published as Michael Ewens & Alexander Gorbenko & Arthur Korteweg, 2021. "Venture capital contracts," Journal of Financial Economics, .

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Journal Article: Venture capital contracts (2022) Downloads
Working Paper: Venture Capital Contracts (2019) Downloads
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