Venture Capital Contracts

Michael Ewens, Alexander Gorbenko and Arthur Korteweg

No hk38u, SocArXiv from Center for Open Science

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.

Date: 2019-07-17
New Economics Papers: this item is included in nep-cfn, nep-ent and nep-pay
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Journal Article: Venture capital contracts (2022)
Working Paper: Venture Capital Contracts (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:osf:socarx:hk38u

DOI: 10.31219/osf.io/hk38u

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