Financing and Advising: Optimal Financial Contracts with Venture Capitalists

Casamatta, Catherine

doi:10.1111/1540-6261.00597

Cited by 526 publications

(330 citation statements)

References 44 publications

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“…Because of moral hazard, only knowledgeable investors who can monitor and influence the venture will invest. The moral hazard also goes in the other direction, as ventures that depend heavily on the entrepreneur's personal human capital are unlikely to accept external advice unaccompanied by a strong financial commitment (Casamatta, 2003). Financial theory thus argues that VCs must possess relevant expertise, especially when investing in uncertain and innovative ventures.…”

Section: The Nature Of Vc Expertisementioning

confidence: 99%

Entrepreneurial learning and the role of venture capitalists

2007

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This paper develops a model of entrepreneurial learning in order to explain how VCs support the process of entrepreneurial learning and thereby add value to their ventures. We draw on two generic approaches to learning, termed the hypothesis-testing mode and the hermeneutic mode, which turn out to be closely interrelated in such learning processes. The resulting model comprises four categories, which focus on what entrepreneurs learn and how it is learnt: experimentation, evaluation, unreflective action and unverified assumptions. We then use these analytical categories to illustrate how VCs apply their different forms of expertise to increase a venture's value once an investment has been made.

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Section: The Nature Of Vc Expertisementioning

confidence: 99%

Entrepreneurial learning and the role of venture capitalists

2007

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“…In our model, active investors are beneficial only if they can be induced to acquire 5 "Front-loading" in our model can also be interpreted as the retention of early-stage profits and using them towards future investments, thereby reducing the active investor's future capital injections. 6 For contributions to the VC contracting literature, see Hellmann (1998), Casamatta (2003), Inderst and Mueller (2003), and Repullo and Suarez (2004). In the stage financing literature, staging is typically interpreted as a short-term financial contract giving the VC control over the continuation decision, which alleviates agency problems (Neher, 1999;Cornelli and Yosha, 2003).…”

Section: Introductionmentioning

confidence: 99%

Early-stage financing and firm growth in new industries

Inderst

Müller

2009

Journal of Financial Economics

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in JEL Classifications: G24; G32Keywords: Venture capital; dynamic investment; product market competition * We thank Tony Bernardo, Marco DaRin, and seminar audiences at NYU and UCLA for helpful comments and suggestions. We are especially grateful to an anonymous referee, whose insightful comments substantially improved the paper.

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“…The start-up faces N+1 a priori identical projects, 8 k ∈ {0, 1, 2, ....., N }. All projects may fail (yield income R L > 0) or succeed (yield income R H = R L + ∆R), but they differ in their probability of success and the nonverifiable private cost they engender for EN.…”

Section: Projectsmentioning

confidence: 99%

Venture Capital Meets Contract Theory: Risky Claims or Formal Control?*

Cestone

2013

Review of Finance

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This paper develops a theory of the joint allocation of formal control and cash-flow rights in venture capital deals. We argue that when the need for investor support calls for very high-powered outside claims, entrepreneurs should optimally retain formal control in order to avoid excessive interference. Hence, we predict that risky claims should be be negatively correlated to control rights, both along the life of a start-up and across deals. This challenges the idea that risky claims should always be associated to more formal control, and is in line with contractual terms increasingly used in venture capital, in corporate venturing and in partnership deals between biotech start-ups and large drug companies. The paper provides a theoretical explanation to some puzzling evidence documented in Gompers (1997) and Kaplan and Strömberg (2000), namely the inclusion in venture capital contracts of contingencies that trigger both a reduction in VC control and the conversion of her preferred stocks into common stocks.

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Financing and Advising: Optimal Financial Contracts with Venture Capitalists

Cited by 526 publications

References 44 publications

Entrepreneurial learning and the role of venture capitalists

Entrepreneurial learning and the role of venture capitalists

Early-stage financing and firm growth in new industries

Venture Capital Meets Contract Theory: Risky Claims or Formal Control?*

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