Conservatism and Innovation in Venture Capital Contracting
Lex Research Topics in Corporate Law & Economics Working Paper No. 2013-2
34 Pages Posted: 12 Feb 2013 Last revised: 16 May 2013
Date Written: May 2013
We conjecture that venture capitalists and their investors often fall prey to what is known as ‘collective conservatism.’ We investigate this conjecture by analyzing boilerplate provisions in limited partnership agreements. When investors accept suboptimal boilerplate provisions it is not because they believe that the standardized terms and conditions sufficiently align the interests of investors and fund managers, but merely because they think their peers, including their competitors, prefer to include them in the limited partnership agreement. We find that the financial crisis has facilitated some notable deviations in the boilerplate provisions that are aimed at returning confidence in the venture capital industry. We argue that a gradual shift may be taking place towards more investor-favorable limited partnership agreements or separate accounts and pledge funds arrangements. These shifts - which do not lead to significant changes in the limited partnership agreements - appear to be particularly effective for bigger funds that increasingly focus on later stage investments. We show that early stage funds are more inclined to enter into innovative collaborative agreements. Collaborative agreements differ from the traditional limited partnership agreements in that they focus less on curtailing principal agent problems and more on joint development and value creation.
Keywords: collaborative agreements, collective conservatism, corporate venture capital, government venture capital, innovation, limited partnership agreement, micro-venture capital, venture capital cycle
JEL Classification: G24, K20, K22, L22, L26
Suggested Citation: Suggested Citation