Hostname: page-component-76d6cb85b7-mgxrv Total loading time: 0 Render date: 2026-07-13T12:28:06.043Z Has data issue: false hasContentIssue false
  • English
  • Français

Changing the Nexus: The Evolution and Renegotiation of Venture Capital Contracts

Published online by Cambridge University Press:  06 August 2015

Ola Bengtsson  and
Berk A. Sensoy
Berk A. Sensoy*
Affiliation:
sensoy.4@fisher.osu.edu, Ohio State University, Fisher College of Business, Columbus, OH 43210.
*
*Corresponding author: sensoy.4@fisher.osu.edu
Get access Rights & Permissions [Opens in a new window]

Abstract

We study the evolution and renegotiation of the cash-flow rights that venture capitalists (VCs) obtain in their portfolio companies. When company performance between financing rounds is poor, subsequent contracts contain stronger VC cash-flow rights, and existing VCs tend to either give new VCs senior claims or forfeit their existing rights altogether. These results are consistent with the importance of financing problems between different VCs and with theory predicting that financing frictions worsen with poor performance. A consequence is that VC cash-flow rights are frequently significantly diluted before exit, implying that VC investments are riskier than previously estimated.

Information

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 3 , June 2015 , pp. 349 - 375
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

References

Bengtsson, O., and Ravid, A.. “Location, Location, Location. The Geography of Venture Capital Contracts.” Working Paper, Lund University (2010).Google Scholar
Bengtsson, O., and Sensoy, B.. “Investor Abilities and Financial Contracting: Evidence from Venture Capital.” Journal of Financial Intermediation, 20 (2011), 477–502.Google Scholar
Benmelech, E., and Bergman, N.. “Liquidation Values and the Credibility of Financial Contract Renegotiation: Evidence from U.S. Airlines.” Quarterly Journal of Economics, 123 (2008), 1635–1677.Google Scholar
Bernanke, B., and Gertler, M.. “Agency Costs, Net Worth, and Business Fluctuations.” American Economic Review, 79 (1989), 14–31.Google Scholar
Bottazzi, L.; Da Rin, M.; and Hellmann, T.. “Who Are the Active Investors? Evidence from Venture Capital.” Journal of Financial Economics, 89 (2008), 488–512.CrossRefGoogle Scholar
Bottazzi, L.; Da Rin, M.; and Hellmann, T.. “What Is the Role of Legal Systems in Financial Intermediation? Theory and Evidence.” Journal of Financial Intermediation, 18 (2009), 559–598.Google Scholar
Broughman, B., and Fried, J.. “Renegotiation of Cash Flow Rights in the Sale of VC-Backed Firms.” Journal of Financial Economics, 95 (2010a), 384–399.Google Scholar
Broughman, B., and Fried, J.. “VC Inside Rounds as Rescue Financing: Theory and Evidence.” Working Paper, Harvard University (2010b).Google Scholar
Cochrane, J. “The Risk and Return of Venture Capital.” Journal of Financial Economics, 75 (2005), 3–52.CrossRefGoogle Scholar
Da Rin, M.; Hellmann, T.; and Puri, M.. “A Survey of Venture Capital Research.” In Handbook of the Economics of Finance, Vol. 2. Amsterdam, The Netherlands: North Holland (2010).Google Scholar
Gompers, P. “Optimal Investment, Monitoring, and the Staging of Venture Capital.” Journal of Finance, 50 (1995), 1461–1489.CrossRefGoogle Scholar
Gompers, P. “An Examination of Convertible Securities in Venture Capital Investments.” Working Paper, Harvard University (1998).Google Scholar
Gompers, P., and Lerner, J.. “An Analysis of Compensation in the U.S. Venture Capital Partnership.” Journal of Financial Economics, 51 (1999), 3–44.Google Scholar
Hart, O., and Moore, J.. “A Theory of Debt Based on the Inalienability of Human Capital.” Quarterly Journal of Economics, 109 (1994), 841–879.Google Scholar
Hellmann, T., and Puri, M.. “Venture Capital and the Professionalization of Startup Firms: Empirical Evidence.” Journal of Finance, 57 (2002), 169–197.Google Scholar
Holmström, B. “Moral Hazard and Observability.” Bell Journal of Economics, 10 (1979), 74–91.Google Scholar
Kaplan, S.; Martel, F.; and Strömberg, P.. “How Do Legal Differences and Experience Affect Financial Contracts?” Journal of Financial Intermediation, 16 (2007), 273–311.Google Scholar
Kaplan, S.; Sensoy, B.; and Strömberg, P.. “How Well Do Venture Capital Databases Reflect Actual Investments?” Working Paper, University of Chicago (2002).CrossRefGoogle Scholar
Kaplan, S.; Sensoy, B.; and Strömberg, P.. “Should Investors Bet on the Jockey or the Horse? Evidence from the Evolution of Firms from Early Business Plans to Public Companies.” Journal of Finance, 64 (2009), 75–115.Google Scholar
Kaplan, S., and Strömberg, P.. “Financial Contracting Meets the Real World: An Empirical Analysis of Venture Capital Contracts.” Review of Economic Studies, 70 (2003), 281–316.Google Scholar
Kaplan, S., and Strömberg, P.. “Characteristics, Contracts, and Actions: Evidence from Venture Capitalist Analyses.” Journal of Finance, 59 (2004), 2177–2210.CrossRefGoogle Scholar
Korteweg, A., and Sorensen, M.. “Risk and Return Characteristics of Venture Capital-Backed Entrepreneurial Companies.” Review of Financial Studies, 23 (2010), 3738–3772.CrossRefGoogle Scholar
Lerner, J., and Schoar, A.. “Does Legal Enforcement Affect Financial Transactions? The Contractual Channel in Private Equity.” Quarterly Journal of Economics, 120 (2005), 223–246.Google Scholar
Metrick, A., and Yasuda, A.. “The Economics of Private Equity Funds.” Review of Financial Studies, 23 (2010a), 2303–2341.Google Scholar
Metrick, A., and Yasuda, A.. Venture Capital and the Finance of Innovation, 2nd ed. New York, NY: Wiley and Sons (2010b).Google Scholar
Metrick, A., and Yasuda, A.. “Venture Capital and Other Private Equity: A Survey.” European Financial Management, 17 (2011), 619–654.CrossRefGoogle Scholar
Myers, S. “Determinants of Corporate Borrowing.” Journal of Financial Economics, 5 (1977), 147–175.Google Scholar
Nanda, R., and Rhodes-Kropf, M.. “Financing Risk and Bubbles of Innovation.” Working Paper, Harvard University (2010).Google Scholar
Roberts, M., and Sufi, A.. “Financial Contracting: A Survey of Empirical Research and Future Directions.” Annual Review of Financial Economics, 1 (2009a), 1–20.Google Scholar
Roberts, M., and Sufi, A.. “Renegotiation of Financial Contracts: Evidence from Private Credit Agreements.” Journal of Financial Economics, 93 (2009b), 159–184.Google Scholar
Robinson, D., and Sensoy, B.. “Do Private Equity Fund Managers Earn Their Fees? Compensation, Ownership, and Cash Flow Performance.” Review of Financial Studies, 26 (2013), 2760–2797.Google Scholar
Sappington, D. “Limited Liability Contracts between Principal and Agent.” Journal of Economic Theory, 29 (1983), 1–21.CrossRefGoogle Scholar