The Contracting and Valuation of Venture Capital-Backed Companies

Forthcoming, Handbook of the Economics of Corporate Finance, Vol 1: Private Equity and Entrepreneurial Finance

101 Pages Posted: 20 Apr 2022 Last revised: 16 Aug 2022

See all articles by Will Gornall

Will Gornall

University of British Columbia (UBC) - Sauder School of Business

Ilya A. Strebulaev

Stanford University - Graduate School of Business; National Bureau of Economic Research

Date Written: March 3, 2022

Abstract

Fast-growing innovative companies - startups - operate unlike other businesses and raise money in similarly distinctive ways. Eschewing traditional banks and equity markets, they turn to a startup financing ecosystem that includes corporate and institutional VC funds, crowdfunding, angel investors, growth equity, and private equity. We start by discussing key relevant stylized facts and how they lead to contracting frictions. We then discuss the various investment contracts used by startups and their associated cash flow and control rights. Given that startups almost invariably raise multiple rounds of funding, we then discuss contracting issues associated with the evolution of cash flow and control rights. We finally discuss approaches to valuing startups, their financial securities, and the impact of contractual terms on valuation.

Keywords: Venture capital, contracting, capital structure, valuation

JEL Classification: G24, G32

Suggested Citation

Gornall, Will and Strebulaev, Ilya A., The Contracting and Valuation of Venture Capital-Backed Companies (March 3, 2022). Forthcoming, Handbook of the Economics of Corporate Finance, Vol 1: Private Equity and Entrepreneurial Finance, Available at SSRN: https://ssrn.com/abstract=4038538 or http://dx.doi.org/10.2139/ssrn.4038538

Will Gornall (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

HOME PAGE: http://willgornall.com

Ilya A. Strebulaev

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

HOME PAGE: http://faculty-gsb.stanford.edu/strebulaev/

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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