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.
The stockholder/stakeholder dilemma has occupied corporate leaders and corporate lawyers for over a century. In addition to the question whose interests should managers prioritize, the question how those interests could or should be balanced has...Read more
Does doing more deals together always strengthen investor relationships? Based on the relationships of the top 50 US venture capital firms, this paper focuses on the strengths of relationships and their dynamic evolution. Empirical estimates...Read more
Understanding an entrepreneurial finance ecosystem requires an appreciation of how different investors interact with each other. Angels and venture capitalists constitute two very important investors in start-ups. We develop and empirically test...Read more
We study how the human capital embedded in teams is reallocated in corporate bankruptcies using data on US inventors. We find that bankruptcies reduce team stability. After a bankruptcy, team-dependent inventors produce fewer and less impactful...Read more