Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts

TLDR

The distinguishing characteristic of VC financings is that they allow VCs to separately allocate cash flow rights, board rights, voting rights, liquidation rights, and other control rights. The study compares the characteristics of real‑world financial contracts to their counterparts in financial contracting theory. The authors analyze actual VC‑entrepreneur contracts, describing and measuring the allocation of cash flow, board, voting, liquidation, and other control rights, and examine their interrelation and evolution across financing rounds in light of existing financial contracting theories.

Abstract

We compare the characteristics of real-world financial contracts to their counterparts in financial contracting theory. We do so by studying the actual contracts between venture capitalists (VCs) and entrepreneurs. The distinguishing characteristic of VC financings is that they allow VCs to separately allocate cash flow rights, board rights, voting rights, liquidation rights, and other control rights. We describe and measure these rights. We then interpret our results in relation to existing financial contracting theories. We also describe the interrelation and the evolution across financing rounds of the different rights.