Venture capital contracts

Michael Ewens, Alexander Gorbenko and Arthur Korteweg

Journal of Financial Economics, 2022, vol. 143, issue 1, 131-158

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, venture capitalists (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 the selection of agents into deals is a first-order factor to take into account in studies of contracting.

Keywords: Venture capital; Contracts; Entrepreneurship; Matching; Structural (search for similar items in EconPapers)
JEL-codes: D86 G24 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Working Paper: Venture Capital Contracts (2019)
Working Paper: Venture Capital Contracts (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:143:y:2022:i:1:p:131-158

DOI: 10.1016/j.jfineco.2021.06.042

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