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Venture Capital Contracts: A survey of the recent literature

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Author Info
Andrea Schertler

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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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Publisher 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
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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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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. 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. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. Schmidt, Klaus M., 1999. "Convertible Securities and Venture Capital Finance," CEPR Discussion Papers 2317, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. 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. [Downloadable!] (restricted)
  6. Cornelli, Francesca & Yosha, Oved, 1997. "Stage Financing and the Role of Convertible Debt," CEPR Discussion Papers 1735, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  7. Kaplan, Steven & Strömberg, Per Johan, 2000. "Financial Contracting Theory Meets The Real World: An Empirical Analysis Of Venture Capital Contracts," CEPR Discussion Papers 2421, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  8. Joshua Lerner, 1994. "The Syndication of Venture Capital Investments," Financial Management, Financial Management Association, vol. 23(3), Fall.
  9. 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. [Downloadable!] (restricted)
  10. Leslie M. Marx, 1998. "Efficient venture capital financing combining debt and equity," Review of Economic Design, Springer, vol. 3(4), pages 371-387. [Downloadable!] (restricted)
  11. 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, vol. 94(4), pages 691-719, August. [Downloadable!] (restricted)
    Other versions:
  12. Christopher B. Barry, 1994. "New Directions in Research on Venture Capital Finance," Financial Management, Financial Management Association, vol. 23(3), Fall.
  13. Neher, Darwin V, 1999. "Staged Financing: An Agency Perspective," Review of Economic Studies, Blackwell Publishing, vol. 66(2), pages 255-74, April. [Downloadable!] (restricted)
  14. Aghion, Philippe & Bolton, Patrick, 1992. "An Incomplete Contracts Approach to Financial Contracting," Review of Economic Studies, Blackwell Publishing, vol. 59(3), pages 473-94, July. [Downloadable!] (restricted)
  15. Trester, Jeffrey J., 1998. "Venture capital contracting under asymmetric information," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 675-699, August. [Downloadable!] (restricted)
  16. 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. [Downloadable!] (restricted)
  17. Bergemann, Dirk & Hege, Ulrich, 1997. "Venture Capital Financing, Moral Hazard and Learning," CEPR Discussion Papers 1738, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  18. Cornelli, F. & Yosha, O., 1997. "Stage Financing and the Role of Convertible Debt," Papers 23-97, Tel Aviv.
  19. Gompers, Paul & Lerner, Josh, 1999. "An analysis of compensation in the U.S. venture capital partnership1," Journal of Financial Economics, Elsevier, vol. 51(1), pages 3-44, January. [Downloadable!] (restricted)
  20. Samuel Kortum & Josh Lerner, 1998. "Does Venture Capital Spur Innovation?," NBER Working Papers 6846, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  21. Berglof, Erik, 1994. "A Control Theory of Venture Capital Finance," Journal of Law, Economics and Organization, Oxford University Press, vol. 10(2), pages 247-67, October.
  22. Bygrave, William D., 1987. "Syndicated investments by venture capital firms: A networking perspective," Journal of Business Venturing, Elsevier, vol. 2(2), pages 139-154. [Downloadable!] (restricted)
  23. Gorman, Michael & Sahlman, William A., 1989. "What do venture capitalists do?," Journal of Business Venturing, Elsevier, vol. 4(4), pages 231-248, July. [Downloadable!] (restricted)
  24. Thakor, Anjan V., 1998. "Comment on Trester," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 700-701, August. [Downloadable!] (restricted)
  25. Thomas Hellmann, 1998. "The Allocation of Control Rights in Venture Capital Contracts," RAND Journal of Economics, The RAND Corporation, vol. 29(1), pages 57-76, Spring. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  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. [Downloadable!]
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