Venture Capital Meets Contract Theory: Risky Claims or Formal Control?*

Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts

In this paper, we compare the characteristics of real world financial contracts to their counterparts in financial contracting theory. We do so by conducting a detailed study of actual contracts between venture capitalists (VCs) and entrepreneurs. VCs are the real world entities who arguably most closely approximate the investors of theory. (1) The distinguishing characteristic of VC financings...

Research on the Allocation of Cash Flow Rights and Control Rights in Venture Capital Financing Contract

In view of the allocation of cash flow rights and control rights in venture capital firms, a financing contract model is set up by introducing the entrepreneur’s self-owned capital in this paper. This paper analyzes the affecting factors and mechanism to the allocation of cash flow rights and control rights, shows the relationship between cash flow rights and control rights, gives the bargain i...

Control and Exit in Venture Capital Relationships

Vesting and Control in Venture Capital Contracts

Vesting of equity payments to an entrepreneur, which is a form of time-contingent compensation, is very common in venture capital contracts. Empirical research suggests that vesting is used to help overcome asymmetric information and agency problems. We show in a theoretical model that vesting equity to an entrepreneur over a long period of time acts as a screening device against a bad entrepre...

How venture capital works.

The popular mythology surrounding the U.S. venture-capital industry derives from a previous era. Venture capitalists who nurtured the computer industry in its infancy were legendary both for their risk taking and for their hands-on operating experience. But today things are different, and separating the myths from the realities is crucial to understanding this important piece of the U.S. econom...