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Venture capital contracts

Ewens, Michael and Gorbenko, Alexander and Korteweg, Arthur (2022) Venture capital contracts. Journal of Financial Economics, 143 (1). pp. 131-158. ISSN 0304-405X. doi:10.1016/j.jfineco.2021.06.042.

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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.

Item Type:Article
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URLURL TypeDescription Paper
Korteweg, Arthur0000-0002-1941-4655
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.
Funding AgencyGrant Number
Linde Institute of Economic and Management ScienceUNSPECIFIED
Subject Keywords:Venture capital; Contracts; Entrepreneurship; Matching; Structural
Issue or Number:1
Classification Code:JEL: C78; D86; G24
Record Number:CaltechAUTHORS:20210714-161615062
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Official Citation:Michael Ewens, Alexander Gorbenko, Arthur Korteweg, Venture capital contracts, Journal of Financial Economics, Volume 143, Issue 1, 2022, Pages 131-158, ISSN 0304-405X,
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:109810
Deposited By: Tony Diaz
Deposited On:14 Jul 2021 17:35
Last Modified:17 Dec 2021 18:15

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