Venture Capital and Private M&A Contracting
59 Pages Posted: 20 Sep 2022
Date Written: September 7, 2022
Using a proprietary dataset of private-startup M&A contracts, I study the role of venture capital firms (VCs) in the exit process of startups. I find M&A contracts are significantly less likely to include earnouts, a proxy for the degree of ex-ante information asymmetry between the contracting parties, when a VC is participating in the transaction. Exploiting within-VC variation, I further show that earnouts are more likely to be used in M&A transactions with high information asymmetry between the VC and the buyer. To explore a possible mechanism through which VCs alleviate ex-ante information-asymmetry problems, I find M&A contracts are less likely to include earnouts when the VC had a previous transaction with the buyer. Lastly, I document that the use of earnouts is lower when it is more difficult for the VC to monitor the startup after the acquisition and when the M&A transaction occurs later in the lifecycle of the VC fund, consistent with post-acquisition monitoring costs and the structure of VC funds playing a role in M&A contracting.
Keywords: Venture capital, private M&A, contracts, asymmetric information, adverse selection, earnouts, relationships
JEL Classification: D82, G24, G34, L14, M40
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