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Venture Capital and Private Equity Contracting, 2nd Edition

Book Description

Other books present corporate finance approaches to the venture capital and private equity industry, but many key decisions require an understanding of the ways that law and economics work together. This revised and updated 2e offers broad perspectives and principles not found in other course books, enabling readers to deduce the economic implications of specific contract terms. This approach avoids the common pitfalls of implying that contractual terms apply equally to firms in any industry anywhere in the world.

In the 2e, datasets from over 40 countries are used to analyze and consider limited partnership contracts, compensation agreements, and differences in the structure of limited partnership venture capital funds, corporate venture capital funds, and government venture capital funds. There is also an in-depth study of contracts between different types of venture capital funds and entrepreneurial firms, including security design, and detailed cash flow, control and veto rights. The implications of such contracts for value-added effort and for performance are examined with reference to data from an international perspective. With seven new or completely revised chapters covering a range of topics from Fund Size and Diseconomies of Scale to Fundraising and Regulation, this new edition will be essential for financial and legal students and researchers considering international venture capital and private equity.



  • An analysis of the structure and governance features of venture capital contracts
  • In-depth study of contracts between different types of venture capital funds and entrepreneurial firms
  • Presents international datasets from over 40 countries around the world
  • Additional references on a companion website
  • Contains sample contracts, including limited partnership agreements, term sheets, shareholder agreements, and subscription agreements

Table of Contents

  1. Cover image
  2. Title page
  3. Table of Contents
  4. Copyright
  5. Dedication
  6. Preface
    1. A Brief Note on Organization and Data
  7. Part One: Introduction
    1. 1. Introduction and Overview
      1. 1.1 What is Venture Capital and Private Equity?
      2. 1.2 How Does Venture Capital and Private Equity Differ from Alternative Sources of Capital?
      3. 1.3 How Large Is the Market for Venture Capital and Private Equity?
      4. 1.4 State of the Venture Capital Market Pre- and Postfinancial Crisis
      5. 1.5 What Issues Are Relevant to the Study of Venture Capital and Private Equity?
      6. Key Terms
      7. Discussion Questions
    2. 2. Overview of Agency Theory, Empirical Methods, and Institutional Contexts
      1. 2.1 Introduction and Learning Objectives
      2. 2.2 Forms of Finance
      3. 2.3 Agency Problems
      4. 2.4 Does Mitigating Agency Problems Enhance Firm Value?
      5. 2.5 Summary and Steps Forward in Remaining Chapters
      6. Key Terms
      7. Discussion Questions
    3. 3. Overview of Institutional Contexts and Empirical Methods
      1. 3.1 Introduction and Learning Objectives
      2. 3.2 An Overview of the International Institutional and Legal Context
      3. 3.3 Statistics and Econometrics Used in This Book
      4. 3.4 Summary
      5. Key Terms
      6. Key Statistical and Econometric Terms
  8. Part Two: Fund Structure and Governance
    1. 4. Fundraising and Regulation
      1. 4.1 Introduction and Learning Objectives
      2. 4.2 Institutional Investor Objectives from Investment in Private Equity
      3. 4.3 Regulation of Institutional Investors and Fund Managers
      4. 4.4 Legal and Institutional Details and Testable Hypotheses
      5. 4.5 Data
      6. 4.6 Multivariate Analyses
      7. 4.7 Extensions and Future Research
      8. 4.8 Conclusions
      9. Key Terms
      10. Discussion Questions
    2. 5. Limited Partnership Agreements
      1. 5.1 Introduction and Learning Objectives
      2. 5.2 Types of Restrictive Covenants
      3. 5.3 What Affects the Frequency of Use of Limited Partnership Covenants?
      4. 5.4 Survey of Private Equity Funds
      5. 5.5 Econometric Tests
      6. 5.6 Limitations, Alternate Explanations, and Future Research
      7. 5.7 Conclusion
      8. 5.8 Key Terms
      9. Discussion Questions
    3. 6. Compensation Contracts
      1. 6.1 Introduction and Learning Objectives
      2. 6.2 Compensation Contracts in Limited Partnerships
      3. 6.3 What Affects the Design of Limited Partnership Compensation Contracts?
      4. 6.4 Data
      5. 6.5 Econometric Tests
      6. 6.6 Limitations, Alternate Explanations, and Future Research
      7. 6.7 Conclusion
      8. Key Terms
      9. Discussion Questions
    4. 7. Style Drift
      1. 7.1 Introduction and Learning Objectives
      2. 7.2 A Theory of Style Drift in Private Equity
      3. 7.3 Data and Descriptive Statistics
      4. 7.4 Regression Analysis
      5. 7.5 Limitations and Future Research
      6. 7.6 Conclusion
      7. Key Terms
      8. Discussion Questions
      9. Appendix
    5. 8. Institutional Investment in Listed Private Equity
      1. 8.1 Introduction and Learning Objectives
      2. 8.2 Literature and Hypotheses
      3. 8.3 Data and Summary Statistics
      4. 8.4 Multivariate Analyses
      5. 8.5 Conclusions
      6. Key Terms
      7. Discussion Questions
    6. 9. The Role of Government and Alternative Policy Options
      1. 9.1 Introduction and Learning Objectives
      2. 9.2 Taxation
      3. 9.3 Securities Laws
      4. 9.4 Regulation Pertaining to the Demand for Entrepreneurial Capital
      5. 9.5 Regulations Pertaining to the Supply of Entrepreneurial Capital
      6. 9.6 Direct Government Investment Programs
      7. 9.7 Summary
      8. Key Terms
      9. Discussion Questions
  9. Part Three: Financial Contracting between Funds and Entrepreneurs
    1. 10. The Investment Process
      1. 10.1 Introduction and Learning Objectives
      2. 10.2 Due Diligence
      3. 10.3 Stage of Development and Industry
      4. 10.4 Staging
      5. 10.5 Fund Flows and Valuations
      6. 10.6 Syndication
      7. 10.7 Board Seats
      8. 10.8 Contract Terms
      9. 10.9 Summary
      10. Key Terms
      11. Discussion Questions
    2. 11. Security Design
      1. 11.1 Introduction and Learning Objectives
      2. 11.2 Theory and Hypotheses
      3. 11.3 Data
      4. 11.4 Empirical Tests
      5. 11.5 Limitations, Alternative Explanations, and Future Research
      6. 11.6 Conclusions
      7. Appendix
      8. Key Words
      9. Discussion Questions
    3. 12. Preplanned Exits and Contract Design
      1. 12.1 Introduction and Learning Objectives
      2. 12.2 Hypotheses
      3. 12.3 Data
      4. 12.4 Multivariate Tests
      5. 12.5 Limitations and Future Research
      6. 12.6 Conclusions
      7. Key Terms
      8. Discussion Questions
    4. 13. Legal Conditions and Venture Capital Governance
      1. 13.1 Introduction
      2. 13.2 Legality and Venture Governance
      3. 13.3 Data and Summary Statistics
      4. 13.4 Regression Analyses
      5. 13.5 Limitations and Future Research
      6. 13.6 Conclusion
      7. Key Terms
      8. Discussion Questions
  10. Part Four: Investor Effort
    1. 14. Investor Value Added
      1. 14.1 Introduction and Learning Objectives
      2. 14.2 Innovation and Efficiency
      3. 14.3 Do Contract Terms Facilitate Investor Effort?
      4. 14.4 Location
      5. 14.5 Portfolio Size and Fund Size
      6. 14.6 Investment Duration
      7. 14.7 Summary
      8. Key Terms
      9. Discussion Questions
    2. 15. Contracts and Effort
      1. 15.1 Introduction and Learning Objectives
      2. 15.2 Hypotheses
      3. 15.3 Methodology
      4. 15.4 The Dataset
      5. 15.5 Econometric Analysis
      6. 15.6 Limitations, Alternative explanations, and Future Research
      7. 15.7 Conclusions
      8. Keywords
      9. Discussion Questions
    3. 16. Local Bias
      1. 16.1 Introduction
      2. 16.2 Hypotheses
      3. 16.3 Data and Summary Statistics
      4. 16.4 Testing Local Bias
      5. 16.5 Factors Contributing to the Local Bias in VC Investments
      6. 16.6 Are Local Ventures More Likely to Be Successful?
      7. 16.7 Conclusions, Implications, and Future Research
      8. Key Terms
      9. Discussion Questions
      10. Appendix
    4. 17. Portfolio Size
      1. 17.1 Introduction and Learning Objectives
      2. 17.2 Comparative Statics and Hypotheses
      3. 17.3 Data
      4. 17.4 Empirical Evidence
      5. 17.5 Conclusion
      6. Appendix
      7. Key Terms
      8. Discussion Questions
    5. 18. Fund Size
      1. 18.1 Introduction
      2. 18.2 Theoretical Considerations
      3. 18.3 The Data Set and Summary Statistics
      4. 18.4 Fund Size, Limited Attention, and Valuation
      5. 18.5 Fund Size, Limited Attention, and Venture Performance
      6. 18.6 Conclusion
      7. Appendix
  11. Part Five: Divestment
    1. 19. The Divestment Process
      1. 19.1 Introduction and Learning Objectives
      2. 19.2 The Economics of Initial Public Offerings
      3. 19.3 The Mode of Exit
      4. 19.4 International Exit Statistics
      5. 19.5 Summary
      6. Key Terms
      7. Discussion Questions
    2. 20. Investment Duration
      1. 20.1 Introduction
      2. 20.2 Venture Capital Investment Duration
      3. 20.3 Institutional Factors Influencing Investment Duration in Canada Versus the United States
      4. 20.4 Data and Summary Statistics
      5. 20.5 Regression Analyses of Time to Exit
      6. 20.6 Discussion and Conclusions
      7. Key Terms
      8. Discussion Questions
    3. 21. Contracts and Exits
      1. 21.1 Introduction and Learning Objectives
      2. 21.2 Hypotheses
      3. 21.3 Variables in the Econometric Specifications
      4. 21.4 Data
      5. 21.5 Multivariate Regressions
      6. 21.6 Conclusion
      7. Key Terms
      8. Discussion Questions
    4. 22. Returns, Valuation, and Disclosure
      1. 22.1 Introduction and Learning Objectives
      2. 22.2 Reporting Biases with Unrealized Investments: Institutional Background and Hypotheses
      3. 22.3 Data
      4. 22.4 Deriving a Benchmark: The Analysis of Realized Returns
      5. 22.5 Analysis of Reporting Biases in Unrealized Investments
      6. 22.6 Conclusion
      7. Key Terms
      8. Discussion Questions
      9. Appendix Venture Capital Valuation Method
  12. Part Six: Conclusion and Appendices
    1. 23. Summary and Concluding Remarks
  13. Bibliography