Joseph McCahery, Erik Vermeulen Conservatism and Innovation in Venture Capital Contracting (01 May 2013) Available at ECGI: http://ecgi.global/working-paper/conservatism-and-innovation-venture-capital-contracting
We conjecture that venture capitalists and their investors often fall prey to what is known as ?collective conservatism.? We investigate this conjecture by analyzing boilerplate provisions in limited partnership agreements.
When investors accept suboptimal boilerplate provisions it is not because they believe that the standardized terms and conditions sufficiently align the interests of investors and fund managers, but merely because they think their peers, including their competitors, prefer to include them in the limited partnership agreement. We find that the financial crisis has facilitated some notable deviations in the boilerplate provisions that are aimed at returning confidence in the venture capital industry. We argue that a gradual shift may be taking place towards more investor-favorable limited partnership agreements or separate accounts and pledge funds arrangements. These shifts - which do not lead to significant changes in the limited partnership agreements - appear to be particularly effective for bigger funds that increasingly focus on later stage investments. We show that early stage funds are more inclined to enter into innovative collaborative agreements. Collaborative agreements differ from the traditional limited partnership agreements in that they focus less on curtailing principal agent problems and more on joint development and value creation.
Current shareholder engagement systems face large classical inefficiencies. First, due to the large chains of intermediaries in the current securities models, transaction costs are high and shareholder votes and other information are not always...Read more
Startup founders, who generally must cede control to obtain VC financing, are widely believed to regain control in the event of IPO, à la Facebook’s Mark Zuckerberg. Indeed, the premise that founders expect to reacquire control if there is an IPO...Read more
Dual-class voting systems have been widely employed in recent initial public offerings by large tech companies, but have been roundly condemned by institutional investors and the S&P 500. As an alternative, commentators have proposed adoption...Read more
This paper studies incentives in a dynamic contracting framework of a levered firm. In particular, the manager selects long-term and short-term efforts, while shareholders choose initially optimal leverage and ex-post optimal default policies....Read more