Changing the Nexus: The Evolution and Renegotiation of Venture Capital Contracts
Lund University School of Economics and Management; Research Institute of Industrial Economics (IFN)
Berk A. Sensoy
Ohio State University - Fisher College of Business
April 26, 2013
Journal of Financial and Quantitative Analysis (JFQA), Forthcoming
Fisher College of Business Working Paper No. 2009-03-019
Charles A. Dice Center Working Paper No. 2009-19
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.
Number of Pages in PDF File: 46
Keywords: Venture capital, financial contracting, renegotiation, debt overhang
JEL Classification: G24, L14Accepted Paper Series
Date posted: September 21, 2009 ; Last revised: May 1, 2013
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