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

46 Pages Posted: 21 Sep 2009 Last revised: 13 Jan 2015

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: April 26, 2013

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.

Keywords: Venture capital, financial contracting, renegotiation, debt overhang

JEL Classification: G24, L14

Suggested Citation

Bengtsson, Ola and Sensoy, Berk A., Changing the Nexus: The Evolution and Renegotiation of Venture Capital Contracts (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. Available at SSRN: https://ssrn.com/abstract=1475347 or http://dx.doi.org/10.2139/ssrn.1475347

Ola Bengtsson (Contact Author)

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

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

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