9,224 research outputs found
What do economists tell us about venture capital contracts?
Venture capital markets are characterized by multiple incentive problems and asymmetric information in an uncertain environment. All kinds of agency problems are present: moral hazard, adverse selection, hold-up problems, window dressing, etc. Entrepreneurs and venture capitalists enter into contracts that influence their behavior and mitigate the agency costs. In particular, they select an appropriate kind and structure of financing and specify the rights as well as the duties of both parties. The typical features of venture capital investments are: an intensive screening and evaluation process, an active involvement of venture capitalists in their portfolio companies, a staging of capital infusions, the use of special financing instruments such as convertible debt or convertible preferred stock, syndication among venture capitalists, or a short investment horizon. --Venture Capital,Agency Costs
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. We consider VCs to be the real world entities who most closely approximate the investors of theory. (1) The distinguishing characteristic of VC financings is that they allow VCs to separately allocate cash flow rights, voting rights, board rights, liquidation rights, and other control rights. We explicitly measure and report the allocation of these rights. (2) While convertible securities are used most frequently, VCs also implement a similar allocation of rights using combinations of multiple classes of common stock and straight preferred stock. (3) Cash flow rights, voting rights, control rights, and future financings are frequently contingent on observable measures of financial and non-financial performance. (4) If the company performs poorly, the VCs obtain full control. As company performance improves, the entrepreneur retains / obtains more control rights. If the company performs very well, the VCs retain their cash flow rights, but relinquish most of their control and liquidation rights. The entrepreneur's cash flow rights also increase with firm performance. (5) It is common for VCs to include non-compete and vesting provisions aimed at mitigating the potential hold-up problem between the entrepreneur and the investor. We interpret our results in relation to existing financial contracting theories. The contracts we observe are most consistent with the theoretical work of Aghion and Bolton (1992) and Dewatripont and Tirole (1994). They also are consistent with screening theories.
Ownership Concentration, 'Private Benefits of Control' and Debt Financing
Building on the âlaw and economicsâ literature, this paper analyses corporate
governance implications of debt financing in an environment where a dominant owner is
able to extract ex ante âprivate benefits of controlâ. Ownership concentration may result in
lower efficiency, measured as a ratio of a firmâs debt to investment, and this effect depends
on the identity of the largest shareholder. Moreover, entrenched dominant shareholder(s)
may be colluding with fixed-claim holders in extracting âcontrol premiumâ. One of possible
outcomes is a âcrowding outâ of entrepreneurial firms from the debt market, and this is
supported by evidence from the transition economies
Founders\u27 Credentials and Performance of Startups
In this dissertation, I unpack startup foundersâ characteristics and investigate their impact on the performance of young high-tech startups. I distinguish specific aspects of founders that convey their unobservable quality and human capital, and advance new arguments that deepen our understanding about foundersâ role in shaping the prospects and performance of young high-tech startups. In particular, I examine foundersâ distinct technical and entrepreneurial credentials that have the effect of facilitating important milestones for startups, such as strategic alliances and initial public offering, which ensure startupsâ growth and survival. Further, I also investigate the contingent effects of these credentials of startup founders on the degree of uncertainty that prevails for potential alliances partners and investors about startupsâ underlying quality. In three essays that comprise this dissertation, I find evidence that startup foundersâ scientific and entrepreneurial credentials promote favorable cooperative commercialization agreements for startups with alliances partners and accelerate their initial public offerings. I also find evidence that these distinct credentials of founders are more useful when there is higher uncertainty about startupsâ quality. These findings have important implications for research in strategy and entrepreneurship about the significance and enduring impact o
What Do Economists Tell Us about Venture Capital Contracts?
Venture capital markets are characterized by multiple incentive problems and asymmetric information in an uncertain environment. All kinds of agency problems are present: moral hazard, adverse selection, hold-up problems, window dressing, etc. Entrepreneurs and venture capitalists enter into contracts that influence their behavior and mitigate the agency costs. In particular, they select an appropriate kind and structure of financing and specify the rights as well as the duties of both parties. The typical features of venture capital investments are: an intensive screening and evaluation process, an active involvement of venture capitalists in their portfolio companies, a staging of capital infusions, the use of special financing instruments such as convertible debt or convertible preferred stock, syndication among venture capitalists, or a short investment horizon
Is There an eBay for Ideas? Insights From Online Knowledge Marketplaces
The market for knowledge has grown dramatically over the past decades. Extant work underscores the factors shaping market efficacy: (a) the cost of searching for innovative knowledge; (b) asymmetric-information between inventors and investors; and (c) the inherent difficulty in maintaining ownership over knowledge. Recently, market transactions have been taking place online, matching disperse owners (entrepreneurs or inventors), and seekers (investors or licensees), of knowledge. This phenomenon constitutes a sharp departure from past practices where transactions tend to materialize around one\u27s social circle (e.g., venture capitalists\u27 social ties). We investigate the drivers of market efficacy in a setting where social ties are not available ex-ante, and identify alternative market mechanisms that emerge in such settings. Using novel hand-collected data for 30 online knowledge marketplaces, we find overwhelming evidence of adverse-selection-mitigating mechanisms (e.g., screening through upfront fees and disclosure requirements). We discuss theoretical explanations that are consistent with the observed mechanisms
Financial Fragility and Economic Performance
Applied macroeconomists (e.g., Eckstein and Sinai (1986)) have stressed the role of financial variables, such as firm balance sheet positions, in the determination of investment spending and output. Our paper presents a formal analysis of this link. We develop a model of the process of investment finance in which there is asymmetric information between borrowers and lenders about the quality of investment projects and about the borrower's effort. In this model, the cost of external investment finance under the optimal contract is higher, the worse the borrower's balance sheet position (i.e., the lower his net worth). In general equilibrium, the lower is borrower net worth, the further the number of projects initiated and the average quality of undertaken projects will be from the unconstrained first-best. We characterize a "financially fragile" situation as one in which balance sheets are so weak that the economy experiences substantial underinvestment, misallocation of investment resources, and possibly even a complete investment collapse. Our policy analysis suggests that, under some circumstances, government "bailouts" of insolvent debtors may be a reasonable alternative in periods of extreme financial fragility.
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