Venture capital contracts
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.
Additional Information
© 2021 Elsevier B.V. Received 19 May 2020, Revised 3 December 2020, Accepted 18 January 2021, Available online 4 July 2021. We are grateful to Ilona Babenko (discussant), Tania Babina (discussant), Vincent Glode (discussant), Will Gornall (discussant), Igor Makarov (discussant), Joshua Mollner (discussant), Pavel Zryumov (discussant), Steven Kaplan, Tim McQuade, Christian Opp, Gordon Phillips, and seminar participants at UC Berkeley (Haas), Boston College, Brigham Young University, California Institute of Technology, Chinese University of Hong Kong, Erasmus University, Hong Kong University of Science and Technology, Imperial College London, Maastricht University, Northwestern University (Kellogg), Stockholm School of Economics, Tilburg University, Tulane University, University College London, University of Illinois Urbana-Champaign, University of Maryland, University of North Carolina, University of Southern California and University of Texas at Austin, and participants at the 2018 NBER Entrepreneurship Summer Institute, the 2018 London Private Equity Symposium, the 2018 Financial Research Association conference, the 2018 Stanford Financing of Innovation Summit, the 2019 American Finance Association meetings, the 2019 Midwest Finance Association meetings, the 2019 Financial Intermediation Research Society meetings, and the 2019 UBC Summer Finance Conference. Jun Chen provided valuable research assistance. We thank the Linde Institute of Economic and Management Sciences for funding.Attached Files
Submitted - SSRN-id3423155.pdf
Supplemental Material - 1-s2.0-S0304405X21003123-mmc1.pdf
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Additional details
- Eprint ID
- 109810
- Resolver ID
- CaltechAUTHORS:20210714-161615062
- Linde Institute of Economic and Management Science
- Created
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2021-07-14Created from EPrint's datestamp field
- Updated
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2021-12-17Created from EPrint's last_modified field