Characteristics, Contracts, and Actions: Evidence from Venture Capitalist Analyses

We study the investment analyses of 67 portfolio investments by 11 venture capital (VC) firms. VCs consider the attractiveness and risks of the business, management, and deal terms as well as expected post-investment monitoring. We then consider the relation of the analyses to the contractual terms. Greater internal and external risks are associated with more VC cash flow rights, VC control rights; greater internal risk, also with more contingencies for the entrepreneur; and greater complexity, with less contingent compensation. Finally, expected VC monitoring and support are related to the contracts. We interpret these results in relation to financial contracting theories.

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.

Why are Buyouts Levered: The Financial Structure of Private Equity Funds

This paper presents a model of the financial structure of private equity firms. In the model, the general partner of the firm encounters a sequence of deals over time where the exact quality of each deal cannot be credibly communicated to investors. We show that the optimal financing arrangement is consistent with a number of characteristics of the private equity industry. First, the firm should be financed by a combination of fund capital raised before deals are encountered, and capital that is raised to finance a specific deal. Second, the fund investors' claim on fund cash flow is a combination of debt and levered equity, while the general partner receives a claim similar to the carry contracts received by real-world practitioners. Third, the fund will be set up in a manner similar to that observed in practice, with investments pooled within a fund, decision rights over investments held by the general partner, and limits set in partnership agreements on the size of particular investments. Fourth, the model suggests that incentives will lead to overinvestment in good states of the world and underinvestment in bad states, so that the natural industry cycles will be multiplied. Fifth, investments made in recessions will on average outperform investments made in booms.

Fiduciary Duties and Equity-Debtholder Conflicts

We use an important legal event to examine the effect of managerial fiduciary duties on equity‐debt conflicts. A 1991 legal ruling changed corporate directors’ fiduciary duties in Delaware firms, limiting managers’ incentives to take actions favoring equity over debt for distressed firms. After this, affected firms responded by increasing equity issues and investment and by reducing risk. The ruling was also followed by an increase in leverage, reduced reliance on covenants, and higher values. Fiduciary duties appear to affect equity‐bond holder conflicts in a way that is economically important, has impact on ex ante capital structure choices, and affects welfare. JEL: G32, G33, L

Venture Capitalists As Principals: Contracting, Screening, and Monitoring

Theoretical work on the principal-agent problem in financial contracting focuses on the conflicts of interest between an agent / entrepreneur with a venture that needs financing, and a principal / investor providing funds for the venture. Theory has identified three primary ways that the investor / principal can mitigate these conflicts - structuring financial contracts, pre-investment screening, and post-investment monitoring and advising. In this paper, we describe recent empirical work and its relation to theory for one prominent class of principals venture capitalists (VCs). The empirical studies indicate that VCs attempt to mitigate principal-agent conflicts in the three ways suggested by theory. The evidence also shows that contracting, screening, and monitoring are closely interrelated. In screening, the VCs identify areas where they can add value through monitoring and support. In contracting, the VCs allocate rights in order to facilitate monitoring and minimize the impact of identified risks. Also, the equity allocated to VCs provides incentives to engage in costly support activities that increase upside values, rather than just minimizing potential losses. There is room for future empirical research to study these activities in greater detail for VCs, for other intermediaries such as banks, and within firms.

The heterogeneity of public ex situ collections of microorganisms: Empirical evidence about conservation practices, industry spillovers and public goods

Access and use of biodiversity Life science research Genetic resources Institutional analysis Governance a b s t r a c t Public service (ex situ) micro-organism collections serve to secure genetic resources for unforeseen future needs, and importantly, to provide authenticated biomaterials for contemporaneous use in private and public entities and as upstream research materials. Hence, it is important to understand the functioning and strategic decisions of these providers of public good resources. 2 The existing literature tends to use case studies of individual collections. This paper uses a unique worldwide survey of microbial collections to analyse the heterogeneity among culture collections, and to empirically assess the economic and institutional conditions that contribute to this heterogeneity with respect to conservation choice and associated industry spillovers. Results suggest that in the short run publicprivate partnerships may indeed support knowledge accumulation with particularly strong public good properties. It is important to be aware of this strong tie, in order to steer also the long term conservation patrimony into one that offers not only short term usability but also resilience to future unforeseen needs e.g. of emerging crop plagues. # 2013 Elsevier Ltd. All rights reserved. 2 Here we refer to public goods in a general way as goods which are relatively costly to exclude others from using, and, whose consumption by one user does not in a significant way reduce the quantity of the good available for others to use

The Fate of Firms: Explaining Mergers and Bankruptcies

Using a uniquely complete data set of more than 50,000 observations of approximately 16,000 corporations, we test theories that seek to explain which firms become merger targets and which firms go bankrupt. We find that merger activity is much greater during prosperous periods than during recessions. In bad economic times, firms in industries with high bankruptcy rates are less likely to file for bankruptcy than they are in better years, supporting the market illiquidity arguments made by Shleifer and Vishny (1992). At the firm level, we find that, among poorly performing firms, the likelihood of merger increases with poorer performance, but among better performing firms, the relation is reversed and chances of merger increase with better performance. Such a changing relation has not been detected in prior merger studies. We also find that low-growth, resource-rich firms are prime acquisition targets and that firms’ debt capacity relates negatively to the likelihood of a merger. Debt-related variables, leverage and secured debt, play an especially prominent role in distinguishing between which firms merge and which firms go bankrupt

Carfilzomib and dexamethasone maintenance following salvage ASCT in multiple myeloma: A randomised phase 2 trial by the Nordic Myeloma Study Group

Objective: We investigated the efficacy and safety of carfilzomib-containing induction before salvage high-dose melphalan with autologous stem-cell transplantation (salvage ASCT) and maintenance with carfilzomib and dexamethasone after salvage ASCT in multiple myeloma.Methods: This randomised, open-label, phase 2 trial included patients with first relapse of multiple myeloma after upfront ASCT who were re-induced with four cycles of carfilzomib, cyclophosphamide and dexamethasone. Two months after salvage, ASCT patients were randomised to either observation or maintenance therapy with iv carfilzomib 27 -> 56 mg/sqm and p.o. dexamethasone 20 mg every second week. The study enrolled 200 patients of which 168 were randomised to either maintenance with carfilzomib and dexamethasone (n = 82) or observation (n = 86).Results: Median time to progression (TTP) after randomisation was 25.1 months (22.5-NR) in the carfilzomib-dexamethasone maintenance group and 16.7 months (14.4-21.8) in the control group (HR 0.46, 95% CI 0.30-0.71; P = .0004). The most common adverse events during maintenance were thrombocytopenia, anaemia, hypertension, dyspnoea and bacterial infections.Conclusion: In summary, maintenance therapy with carfilzomib and dexamethasone after salvage ASCT prolonged TTP with 8 months. The maintenance treatment was in general well-tolerated with manageable toxicity.</p