How Do Financial Contracts Evolve for New Ventures

43 Pages Posted: 17 Jan 2020 Last revised: 1 Nov 2021

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: October 29, 2021


While previous research has characterized the key features of contracts between
entrepreneurs and venture capitalists, little is known about the contracts’ evolution over
time and across funding rounds. We overcome significant data challenges to compile a
novel panel dataset of U.S. early-stage ventures that includes the main financial and
control rights offered to investors at each (equity) funding round. We also gather
substantial information on the investors and founders at each funding round, as possible
determinants of changes in the contractual rights. We find that there is a ‘default
contract’ with a distinct combination of rights that the majority of companies gravitate
to. This default contract is typically implemented in the initial Series A funding round
and rarely deviated from in later rounds. Whenever deviations do occur, terms are
usually revised in favour of investors, and not entrepreneurs. Due to this stickiness of
the default contract, particularly for successful startups, we argue that post-money
valuations can be a reasonable proxy for the economic value of the firm.

Keywords: Start-ups, financial contract terms, preferred stocks, valuation

JEL Classification: G23, G24, G32

Suggested Citation

Jenkinson, Tim and Rauch, Christian and Fu, Danying, How Do Financial Contracts Evolve for New Ventures (October 29, 2021). Available at SSRN: or

Tim Jenkinson

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
United Kingdom
+44 1865 288916 (Phone)
+44 1865 288831 (Fax)


European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels


Christian Rauch

American University of Sharjah ( email )

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

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