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Venture Capital Contracts: A survey of the recent literature

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  • Andrea Schertler

Abstract

This paper surveys empirical and theoretical studies of various control mechanisms embedded in venture capital contracts. These mechanisms mitigate incentive problems and opportunistic behavior arising in the uncertain environment of financing young high-technology enterprises that predominantly invest in intangible assets. In particular, the paper discusses the entrepreneursÂ’ compensation, the type of financing, the staging of capital infusions, and various control rights explicitly given to venture capitalists. While theoretical studies explain some of the mechanisms empirically observed, others and the combinations of control mechanisms often used are still unexplained.

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1017.

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Length: 25 pages
Date of creation: Dec 2000
Date of revision:
Handle: RePEc:kie:kieliw:1017

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Related research

Keywords: venture capital contracts; stage financing; convertible securities; entrepreneursÂ’ compensation;

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References

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  1. Gompers, Paul A, 1995. " Optimal Investment, Monitoring, and the Staging of Venture Capital," Journal of Finance, American Finance Association, vol. 50(5), pages 1461-89, December.
  2. Klaus M. Schmidt, 2003. "Convertible Securities and Venture Capital Finance," Journal of Finance, American Finance Association, vol. 58(3), pages 1139-1166, 06.
  3. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(4), pages 691-719, August.
  4. Bergemann, D. & Hege, U., 1997. "Venture Capital Financing, Moral Hazard and Learning," Discussion Paper, Tilburg University, Center for Economic Research 1997-108, Tilburg University, Center for Economic Research.
  5. Steven N. Kaplan & Per Stromberg, 2000. "Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts," NBER Working Papers 7660, National Bureau of Economic Research, Inc.
  6. Thakor, Anjan V., 1998. "Comment on Trester," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 700-701, August.
  7. Gorman, Michael & Sahlman, William A., 1989. "What do venture capitalists do?," Journal of Business Venturing, Elsevier, vol. 4(4), pages 231-248, July.
  8. Samuel Kortum & Josh Lerner, 1998. "Does Venture Capital Spur Innovation?," NBER Working Papers 6846, National Bureau of Economic Research, Inc.
  9. Black, Bernard S. & Gilson, Ronald J., 1998. "Venture capital and the structure of capital markets: banks versus stock markets," Journal of Financial Economics, Elsevier, vol. 47(3), pages 243-277, March.
  10. Ruhnka, John C. & Young, John E., 1987. "A venture capital model of the development process for new ventures," Journal of Business Venturing, Elsevier, vol. 2(2), pages 167-184.
  11. Cornelli, F. & Yosha, O., 1997. "Stage Financing and the Role of Convertible Debt," Papers, Tel Aviv 23-97, Tel Aviv.
  12. Gompers, Paul & Lerner, Josh, 1999. "An analysis of compensation in the U.S. venture capital partnership," Journal of Financial Economics, Elsevier, vol. 51(1), pages 3-44, January.
  13. Megginson, William L & Weiss, Kathleen A, 1991. " Venture Capitalist Certification in Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(3), pages 879-903, July.
  14. Bygrave, William D., 1987. "Syndicated investments by venture capital firms: A networking perspective," Journal of Business Venturing, Elsevier, vol. 2(2), pages 139-154.
  15. Aghion, Philippe & Bolton, Patrick, 1992. "An Incomplete Contracts Approach to Financial Contracting," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 59(3), pages 473-94, July.
  16. Berglof, Erik, 1994. "A Control Theory of Venture Capital Finance," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 10(2), pages 247-67, October.
  17. Chan, Yuk-Shee & Siegel, Daniel R & Thakor, Anjan V, 1990. "Learning, Corporate Control and Performance Requirements in Venture Capital Contracts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(2), pages 365-81, May.
  18. Christopher B. Barry, 1994. "New Directions in Research on Venture Capital Finance," Financial Management, Financial Management Association, Financial Management Association, vol. 23(3), Fall.
  19. Neher, Darwin V, 1999. "Staged Financing: An Agency Perspective," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 66(2), pages 255-74, April.
  20. Trester, Jeffrey J., 1998. "Venture capital contracting under asymmetric information," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 675-699, August.
  21. Leslie M. Marx, 1998. "Efficient venture capital financing combining debt and equity," Review of Economic Design, Springer, vol. 3(4), pages 371-387.
  22. Cornelli, Francesca & Yosha, Oved, 1997. "Stage Financing and the Role of Convertible Debt," CEPR Discussion Papers 1735, C.E.P.R. Discussion Papers.
  23. Brav, Alon & Gompers, Paul A, 1997. " Myth or Reality? The Long-Run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital-Backed Companies," Journal of Finance, American Finance Association, vol. 52(5), pages 1791-1821, December.
  24. Joshua Lerner, 1994. "The Syndication of Venture Capital Investments," Financial Management, Financial Management Association, Financial Management Association, vol. 23(3), Fall.
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Citations

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Cited by:
  1. Andrea Schertler, 2000. "The Impact of Public Subsidies on Venture Capital Investments in Start-Up Enterprises," Kiel Working Papers 1018, Kiel Institute for the World Economy.
  2. Engelhardt, Lutz, 2004. "Entrepreneurial business models in the German software industry: Companies, venture capital, and stock market based growth strategies on the Neuer Markt," Discussion Papers, Research Unit: Institutions, States, Markets SP II 2004-04, Social Science Research Center Berlin (WZB).
  3. Wolf, Björn, 2006. "Empirische Untersuchung zu den Einflussfaktoren der Finanzierungsprobleme junger Unternehmen in Deutschland und deren Auswirkungen auf die Wirtschaftspolitik," Working Papers "Firms and Region" U1/2006, Fraunhofer Institute for Systems and Innovation Research (ISI).

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