Financial Contracts and Venture Capitalists' Value-Added
COMPANION TO VENTURE CAPITAL, Douglas J. Cumming, ed., Chapter 8, Wiley, Forthcoming
Posted: 2 Mar 2009
Date Written: March 2, 2009
The objective of this chapter is to review the sources of value-added of venture capitalists, and to understand what contractual tools can help them to take relevant decisions and enhance firm value. The chapter is organized as follows. The first section rapidly surveys the literature on the forms and means of value-added of venture capitalists. The following section develops a model of start-up financing to investigate the advising role of venture capitalists. The analysis of the model first provides a comparison of the efficiency of venture capital advice compared to pure consultant advice. It then studies the shape of the optimal financial contract between entrepreneurs and venture capitalists. The last section discusses to what extent the results presented in the model can explain observed patterns of venture capital.
Keywords: venture capital, financial contracts, value-added, double-sided moral hazard
JEL Classification: G24, G32
Suggested Citation: Suggested Citation