Success Is Good but Failure Is Not So Bad Either: Serial Entrepreneurs and Venture Capital Contracting

71 Pages Posted: 16 Jul 2019 Last revised: 25 Aug 2019

See all articles by Rajarishi Nahata

Rajarishi Nahata

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Date Written: July 15, 2019

Abstract

I analyze prior entrepreneurship as a determinant of financial contracting with venture capitalists and find more company-favorable contracts in startups founded by serial entrepreneurs. Repeat founders and other insiders retain greater board control and also suffer less equity dilution in their dealings with VCs. Second, serial founders retain their CEO positions more often. Third, startups founded by serial entrepreneurs obtain higher valuations at VC funding although this finding is confined to previously successful founders who also obtain the best contracts. Interestingly these results obtain despite poorer performance of such startups and VCs funding them sooner. Overall, even previously unsuccessful serial entrepreneurs receive better deal terms than novice founders, consistent with entrepreneurial learning being an important factor in fostering future entrepreneurship.

Keywords: Venture Capital, Financial Contracting, Serial Entrepreneurship

JEL Classification: G24

Suggested Citation

Nahata, Rajarishi, Success Is Good but Failure Is Not So Bad Either: Serial Entrepreneurs and Venture Capital Contracting (July 15, 2019). Journal of Corporate Finance, Forthcoming; Baruch College Zicklin School of Business Research Paper No. 2019-07-05. Available at SSRN: https://ssrn.com/abstract=3420183

Rajarishi Nahata (Contact Author)

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

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