Venture Capital and Private M&A Contracting

Abstract

This study investigates the role of venture capital (VC) firms in private mergers and acquisitions (M&A) contracting, particularly in reducing information asymmetry. Analyzing a proprietary dataset of 851 startup acquisitions from 2015 to 2020, I find that M&A contracts are significantly less likely to include earnouts, mechanisms designed to mitigate information asymmetry, when a VC is involved in the transaction. Further analysis reveals that earnouts are more likely in transactions with high information asymmetry between the VC and the buyer. The study also examines the effect of prior relationships between VCs and buyers, showing that these connections not only increase the chances of repeat transactions but also further reduce the reliance on earnouts. These findings suggest that VCs play a crucial role in mitigating information asymmetry, reducing the need for earnouts, and ultimately improving M&A outcomes.

Keywords: Venture capital, private M&A, contracts, asymmetric information, adverse selection, earnouts, relationships

JEL Classification: D82, G24, G34, L14, M40