How Do Financial Contracts Evolve for New Ventures

36 Pages Posted: 17 Jan 2020

See all articles by Tim Jenkinson

Tim Jenkinson

University of Oxford - Said Business School; European Corporate Governance Institute (ECGI)

Christian Rauch

American University of Sharjah

Danying Fu

Said Business School

Date Written: December 31, 2019


While previous papers have characterized various features of the financial contracts between entrepreneurs and venture capitalists, little is known about how the equity contracts evolve over the life of new ventures. Using the novel data set containing financial contract terms applying to different classes of stock, this paper is the first to focus on exploring the how the equity contract terms granted by the same investee private firms may vary across time, and determining the possible influencing factors. We find that there exists a default contract, for the terms adopt by different companies or used by the same companies in different funding rounds are surprisingly similar. Further, we notice, by analyzing the evolution patterns, that equity contracts change asymmetrically across different terms and at different stages of the investee firms. We also provide insights into the discussion on whether employing post-money valuation will definitely result in the over-valuation of start-ups. Our preliminary regression results show that the headroom, the new measure we developed as a proxy for the company’s financial flexibility, be negatively related to the dilution of common stockholders’ ownership of the company.

Keywords: New ventures, convertible preferred stock, financial contract terms

JEL Classification: G23, G24, G32

Suggested Citation

Jenkinson, Tim and Rauch, Christian and Fu, Danying, How Do Financial Contracts Evolve for New Ventures (December 31, 2019). Available at SSRN: or

Tim Jenkinson

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
United Kingdom
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European Corporate Governance Institute (ECGI)

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Christian Rauch

American University of Sharjah ( email )

P.O. Box 26666
University City
Sharjah, Greater Dubai Area
United Arab Emirates

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