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Venture capital contracts

Ewens, M; Gorbenko, AS; Korteweg, AG; (2022) Venture capital contracts. Journal of Financial Economics , 143 (1) pp. 131-158. 10.1016/j.jfineco.2021.06.042. Green open access

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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.

Type: Article
Title: Venture capital contracts
Open access status: An open access version is available from UCL Discovery
DOI: 10.1016/j.jfineco.2021.06.042
Publisher version: https://doi.org/10.1016/j.jfineco.2021.06.042
Language: English
Additional information: This version is the author accepted manuscript. For information on re-use, please refer to the publisher's terms and conditions.
Keywords: Venture capital, Contracts, Entrepreneurship, Matching, Structural
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL BEAMS
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science > UCL School of Management
URI: https://discovery.ucl.ac.uk/id/eprint/10128871
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