Venture Capital and Private Equity Contracting

Chapter 14. Preplanned Exits and Contract Design

14.1. Introduction and Learning Objectives

Venture capital contracts govern long-term relations between entrepreneurs and their investors in a way that establishes cash flow and control rights. The long-term nature of venture capitalist-entrepreneur relationships leaves entrepreneurs open to exploitation by venture capitalists (Atanasov et al., 2006; Fried and Ganor, 2006) and venture capitalists open to expropriation by entrepreneurs (Casamatta, 2003; Kaplan and Strömberg, 2003; Schmidt, 2003). It is therefore natural for contracts to depend on the bargaining power of venture capitalists and the entrepreneurs, as well as the legal environment that governs the relationships between the parties. ...