Experience, contractual covenants and venture capitalists' responses to unmet expectations

Annaleena Parhankangas, Hans Landström and D. Gordon Smith

Venture Capital, 2005, vol. 7, issue 4, 297-318

Abstract: The focus of this paper is on the role of experience in situations where venture capital contracts are drafted and applied. Based on a study of 78 Nordic venture capitalists, it was found that investors with venture capital and business experience include more protective clauses in venture capital contracts than their inexperienced colleagues. However, experienced investors were less likely to exercise these rights. The only deviation from this pattern was prior exposure to conflicts, prompting the use of contractual rights and discouraging compromise and patience in problematic situations with entrepreneurs. It also seems that the content of the contract shapes investors' reactions to unmet expectations: control rights tend to promote ‘relational’ approaches to solving problems emanating in the venture capitalist-entrepreneur relationship, whereas exit rights seem to decrease the venture capitalist's willingness to compromise in the face of unmet expectations caused by the entrepreneur.

Date: 2005
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DOI: 10.1080/13691060500120929

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