VC Contract Design: Development State, Bargaining Power, and the Classification of Early-Cycle Companies

Private equity shareholder agreements are essential to the successful relationship between venture capital (VC) providers and recipients and are structured to balance the interests and objectives of both parties. However, these contracts are complex and contain a broad range of design options. The a...

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Bibliographic Details
Published in:The journal of private equity 2017-09, Vol.20 (4), p.36-46
Main Authors: Sonius, David, Yerkes, Rustin T., Westhues, Katharina
Format: Article
Language:English
Subjects:
Agreements
Bargaining
Business metrics
Capital structure
Collaboration
Debt financing
Decision making
Economic models
Entrepreneurship
Funding
Growth rate
Hypotheses
Organizational structure
Private equity
Product development
Profitability
Questionnaires
Startups
Stockholders
Venture capital
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Summary:Private equity shareholder agreements are essential to the successful relationship between venture capital (VC) providers and recipients and are structured to balance the interests and objectives of both parties. However, these contracts are complex and contain a broad range of design options. The authors propose a model to classify early-cycle companies into four groups according to two dimensions: bargaining power and development state. Their survey of VC providers suggests most VC contracts include a core set of standardized investor rights. Additionally, there are varying rights according to the degree of bargaining power and development state, preserving contract flexibility to accommodate a range of investment prospects.
ISSN:1096-5572
2168-8508
DOI:10.3905/jpe.2017.20.4.036