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.
For the last decade economists have been preoccupied with the decline in bank financing to small businesses and entrepreneurs. This effort has produced a better understanding of the obstacles to external financing. We examine the market and ...Read more
‘Crowdfunding’ — raising capital through large numbers of small contributions — is a burgeoning phenomenon, spurred by the internet’s capacity to reduce communication costs. Its still-evolving status is reflected in diversity of contracting...Read more
This paper reviews the theoretical and empirical literature on executive compensation. We start by presenting data on the level of CEO and other top executive pay over time and across firms, the changing composition of pay; and the strength of...Read more