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Changing the Nexus: The Evolution and Renegotiation of Venture Capital Contracts

Published online by Cambridge University Press:  06 August 2015

Ola Bengtsson  and
Berk A. Sensoy
Berk A. Sensoy*
Affiliation:
sensoy.4@fisher.osu.edu, Ohio State University, Fisher College of Business, Columbus, OH 43210.
*
*Corresponding author: sensoy.4@fisher.osu.edu
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Abstract

We study the evolution and renegotiation of the cash-flow rights that venture capitalists (VCs) obtain in their portfolio companies. When company performance between financing rounds is poor, subsequent contracts contain stronger VC cash-flow rights, and existing VCs tend to either give new VCs senior claims or forfeit their existing rights altogether. These results are consistent with the importance of financing problems between different VCs and with theory predicting that financing frictions worsen with poor performance. A consequence is that VC cash-flow rights are frequently significantly diluted before exit, implying that VC investments are riskier than previously estimated.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 3 , June 2015 , pp. 349 - 375
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

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