Investor Abilities and Financial Contracting: Evidence from Venture Capital

47 Pages Posted: 21 Aug 2008 Last revised: 29 Oct 2014

Ola Bengtsson

Lund University School of Economics and Management; Research Institute of Industrial Economics (IFN)

Berk A. Sensoy

Ohio State University - Fisher College of Business

Date Written: January 29, 2011

Abstract

Using a large, new database of contractual provisions governing the allocation of cash flow rights in venture capital (VC) financings, we investigate how contract design is related to VC abilities to monitor and provide value-added services to the entrepreneur. We find that more experienced VCs, who have superior abilities and more frequently join the boards of their portfolio companies, obtain weaker downside-protecting contractual cash flow rights than less experienced VCs. Several pieces of evidence suggest that this relation is unlikely to be driven by selection effects. The results suggest that VCs with better governance abilities focus less on obtaining downside protections, which entail risk-sharing costs, and more on other aspects of the contract (such as obtaining board representation) during negotiations with entrepreneurs. The results also imply that previous estimates of the amount entrepreneurs pay for affiliation with high-quality VCs are overstated.

Keywords: Venture capital, Financial Contracting, Entrepreneur, Agency

JEL Classification: G24, G32

Suggested Citation

Bengtsson, Ola and Sensoy, Berk A., Investor Abilities and Financial Contracting: Evidence from Venture Capital (January 29, 2011). Dice Center Working Paper No. 2009-22; Journal of Financial Intermediation, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1240844

Ola Bengtsson

Lund University School of Economics and Management ( email )

P.O Box 7080
Lund
Sweden

HOME PAGE: http://www.olabengtsson.com

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Berk A. Sensoy (Contact Author)

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

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