The Dynamics of Venture Capital Contracts

Abstract

Using a detailed German data set on venture capital contracts, we document that contracts between venture capitalists and their portfolio firms specify more complete conditions for future financing for firms that do have no suitable outside financing option, and therefore lower ex-post bargaining power. Our result is consistent with theories of hold-up, where complete contracts protect the entrepreneur from expropriation by the financier. Moreover, there is evidence of learning by venture capitalists. Other possible explanations for observed contracts, such as multitasking or coordination costs, instead have little explanation power.

Keywords: Venture capital, hold-up, renegotiation, staging, milestones

JEL Classification: G24, G32, G34