Venture Capital and Private Equity Contracting

Venture Capital and Private Equity Contracting

An International Perspective

2nd Edition - August 21, 2013
This is the Latest Edition
  • Authors: Douglas Cumming, Sofia Johan
  • eBook ISBN: 9780124095960
  • Hardcover ISBN: 9780124095373

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Description

Other books present corporate finance approaches to the venture capital and private equity industry, but many key decisions require an understanding of the ways that law and economics work together. This revised and updated 2e offers broad perspectives and principles not found in other course books, enabling readers to deduce the economic implications of specific contract terms. This approach avoids the common pitfalls of implying that contractual terms apply equally to firms in any industry anywhere in the world. In the 2e, datasets from over 40 countries are used to analyze and consider limited partnership contracts, compensation agreements, and differences in the structure of limited partnership venture capital funds, corporate venture capital funds, and government venture capital funds. There is also an in-depth study of contracts between different types of venture capital funds and entrepreneurial firms, including security design, and detailed cash flow, control and veto rights. The implications of such contracts for value-added effort and for performance are examined with reference to data from an international perspective. With seven new or completely revised chapters covering a range of topics from Fund Size and Diseconomies of Scale to Fundraising and Regulation, this new edition will be essential for financial and legal students and researchers considering international venture capital and private equity.

Key Features

  • An analysis of the structure and governance features of venture capital contracts
  • In-depth study of contracts between different types of venture capital funds and entrepreneurial firms
  • Presents international datasets from over 40 countries around the world
  • Additional references on a companion website
  • Contains sample contracts, including limited partnership agreements, term sheets, shareholder agreements, and subscription agreements

Readership

Undergraduates and graduate students of economics, law and business interested in studying financial and legal aspects of venture capital and private equity

Table of Contents

  • Dedication

    Preface

    A Brief Note on Organization and Data

    Part One: Introduction

    1. Introduction and Overview

    1.1 What is Venture Capital and Private Equity?

    1.2 How Does Venture Capital and Private Equity Differ from Alternative Sources of Capital?

    1.3 How Large Is the Market for Venture Capital and Private Equity?

    1.4 State of the Venture Capital Market Pre- and Postfinancial Crisis

    1.5 What Issues Are Relevant to the Study of Venture Capital and Private Equity?

    Key Terms

    Discussion Questions

    2. Overview of Agency Theory, Empirical Methods, and Institutional Contexts

    2.1 Introduction and Learning Objectives

    2.2 Forms of Finance

    2.3 Agency Problems

    2.4 Does Mitigating Agency Problems Enhance Firm Value?

    2.5 Summary and Steps Forward in Remaining Chapters

    Key Terms

    Discussion Questions

    3. Overview of Institutional Contexts and Empirical Methods

    3.1 Introduction and Learning Objectives

    3.2 An Overview of the International Institutional and Legal Context

    3.3 Statistics and Econometrics Used in This Book

    3.4 Summary

    Key Terms

    Key Statistical and Econometric Terms

    Part Two: Fund Structure and Governance

    4. Fundraising and Regulation

    4.1 Introduction and Learning Objectives

    4.2 Institutional Investor Objectives from Investment in Private Equity

    4.3 Regulation of Institutional Investors and Fund Managers

    4.4 Legal and Institutional Details and Testable Hypotheses

    4.5 Data

    4.6 Multivariate Analyses

    4.7 Extensions and Future Research

    4.8 Conclusions

    Key Terms

    Discussion Questions

    5. Limited Partnership Agreements

    5.1 Introduction and Learning Objectives

    5.2 Types of Restrictive Covenants

    5.3 What Affects the Frequency of Use of Limited Partnership Covenants?

    5.4 Survey of Private Equity Funds

    5.5 Econometric Tests

    5.6 Limitations, Alternate Explanations, and Future Research

    5.7 Conclusion

    5.8 Key Terms

    Discussion Questions

    6. Compensation Contracts

    6.1 Introduction and Learning Objectives

    6.2 Compensation Contracts in Limited Partnerships

    6.3 What Affects the Design of Limited Partnership Compensation Contracts?

    6.4 Data

    6.5 Econometric Tests

    6.6 Limitations, Alternate Explanations, and Future Research

    6.7 Conclusion

    Key Terms

    Discussion Questions

    7. Style Drift

    7.1 Introduction and Learning Objectives

    7.2 A Theory of Style Drift in Private Equity

    7.3 Data and Descriptive Statistics

    7.4 Regression Analysis

    7.5 Limitations and Future Research

    7.6 Conclusion

    Key Terms

    Discussion Questions

    Appendix

    8. Institutional Investment in Listed Private Equity

    8.1 Introduction and Learning Objectives

    8.2 Literature and Hypotheses

    8.3 Data and Summary Statistics

    8.4 Multivariate Analyses

    8.5 Conclusions

    Key Terms

    Discussion Questions

    9. The Role of Government and Alternative Policy Options

    9.1 Introduction and Learning Objectives

    9.2 Taxation

    9.3 Securities Laws

    9.4 Regulation Pertaining to the Demand for Entrepreneurial Capital

    9.5 Regulations Pertaining to the Supply of Entrepreneurial Capital

    9.6 Direct Government Investment Programs

    9.7 Summary

    Key Terms

    Discussion Questions

    Part Three: Financial Contracting between Funds and Entrepreneurs

    10. The Investment Process

    10.1 Introduction and Learning Objectives

    10.2 Due Diligence

    10.3 Stage of Development and Industry

    10.4 Staging

    10.5 Fund Flows and Valuations

    10.6 Syndication

    10.7 Board Seats

    10.8 Contract Terms

    10.9 Summary

    Key Terms

    Discussion Questions

    11. Security Design

    11.1 Introduction and Learning Objectives

    11.2 Theory and Hypotheses

    11.3 Data

    11.4 Empirical Tests

    11.5 Limitations, Alternative Explanations, and Future Research

    11.6 Conclusions

    Appendix

    Key Words

    Discussion Questions

    12. Preplanned Exits and Contract Design

    12.1 Introduction and Learning Objectives

    12.2 Hypotheses

    12.3 Data

    12.4 Multivariate Tests

    12.5 Limitations and Future Research

    12.6 Conclusions

    Key Terms

    Discussion Questions

    13. Legal Conditions and Venture Capital Governance

    13.1 Introduction

    13.2 Legality and Venture Governance

    13.3 Data and Summary Statistics

    13.4 Regression Analyses

    13.5 Limitations and Future Research

    13.6 Conclusion

    Key Terms

    Discussion Questions

    Part Four: Investor Effort

    14. Investor Value Added

    14.1 Introduction and Learning Objectives

    14.2 Innovation and Efficiency

    14.3 Do Contract Terms Facilitate Investor Effort?

    14.4 Location

    14.5 Portfolio Size and Fund Size

    14.6 Investment Duration

    14.7 Summary

    Key Terms

    Discussion Questions

    15. Contracts and Effort

    15.1 Introduction and Learning Objectives

    15.2 Hypotheses

    15.3 Methodology

    15.4 The Dataset

    15.5 Econometric Analysis

    15.6 Limitations, Alternative explanations, and Future Research

    15.7 Conclusions

    Keywords

    Discussion Questions

    16. Local Bias

    16.1 Introduction

    16.2 Hypotheses

    16.3 Data and Summary Statistics

    16.4 Testing Local Bias

    16.5 Factors Contributing to the Local Bias in VC Investments

    16.6 Are Local Ventures More Likely to Be Successful?

    16.7 Conclusions, Implications, and Future Research

    Key Terms

    Discussion Questions

    Appendix

    17. Portfolio Size

    17.1 Introduction and Learning Objectives

    17.2 Comparative Statics and Hypotheses

    17.3 Data

    17.4 Empirical Evidence

    17.5 Conclusion

    Appendix

    Key Terms

    Discussion Questions

    18. Fund Size

    18.1 Introduction

    18.2 Theoretical Considerations

    18.3 The Data Set and Summary Statistics

    18.4 Fund Size, Limited Attention, and Valuation

    18.5 Fund Size, Limited Attention, and Venture Performance

    18.6 Conclusion

    Appendix

    Part Five: Divestment

    19. The Divestment Process

    19.1 Introduction and Learning Objectives

    19.2 The Economics of Initial Public Offerings

    19.3 The Mode of Exit

    19.4 International Exit Statistics

    19.5 Summary

    Key Terms

    Discussion Questions

    20. Investment Duration

    20.1 Introduction

    20.2 Venture Capital Investment Duration

    20.3 Institutional Factors Influencing Investment Duration in Canada Versus the United States

    20.4 Data and Summary Statistics

    20.5 Regression Analyses of Time to Exit

    20.6 Discussion and Conclusions

    Key Terms

    Discussion Questions

    21. Contracts and Exits

    21.1 Introduction and Learning Objectives

    21.2 Hypotheses

    21.3 Variables in the Econometric Specifications

    21.4 Data

    21.5 Multivariate Regressions

    21.6 Conclusion

    Key Terms

    Discussion Questions

    22. Returns, Valuation, and Disclosure

    22.1 Introduction and Learning Objectives

    22.2 Reporting Biases with Unrealized Investments: Institutional Background and Hypotheses

    22.3 Data

    22.4 Deriving a Benchmark: The Analysis of Realized Returns

    22.5 Analysis of Reporting Biases in Unrealized Investments

    22.6 Conclusion

    Key Terms

    Discussion Questions

    Appendix Venture Capital Valuation Method

    Part Six: Conclusion and Appendices

    23. Summary and Concluding Remarks

    Bibliography

Product details

  • No. of pages: 780
  • Language: English
  • Copyright: © Elsevier 2013
  • Published: August 21, 2013
  • Imprint: Elsevier
  • eBook ISBN: 9780124095960
  • Hardcover ISBN: 9780124095373
  • About the Authors

    Douglas Cumming

    Douglas Cumming
    Douglas Cumming, J.D., Ph.D., CFA, is the DeSantis Distinguished Professor of Finance and Entrepreneurship the College of Business, Florida Atlantic University. His research interests include crowdfunding, venture capital, private equity, hedge funds, entrepreneurship, and law and finance. He is the Managing Editor-in-Chief of the Journal of Corporate Finance (2018-2020) and the incoming Co-Editor-in-Chief of the British Journal of Management (2020-2022). He been a guest editor for over a dozen special issues of top journals. He has published over 180 articles in leading refereed academic journals in finance, management, and law and economics, such as the Academy of Management Journal, Journal of Financial Economics, Review of Financial Studies, Journal of International Business Studies, and the Journal of Empirical Legal Studies. His work has been reviewed in numerous media outlets, including the Chicago Tribune, The Economist, Canadian Business, the National Post, the New York Times, and The New Yorker. Douglas is a regular speaker at academic and industry conferences around the world. He has given recent keynote speeches at the British Academy of Management Corporate Governance Conference, Entrepreneurial Finance Association, Financial Research Network Corporate Finance Conference, French Finance Association, Infiniti Conference on International Finance, Vietnam Symposium in Banking and Finance, the Budapest Liquidity and Financial Markets Conference, and the Humbolt University of Berlin Fintech Conference, among others. Much of Douglas Cumming’s work is online at SSRN: http://ssrn.com/author=75390

    Affiliations and Expertise

    DeSantis Distinguished Professor of Finance and Entrepreneurship, College of Business, Florida Atlantic University - Boca Raton, FL, USA

    Sofia Johan

    Sofia Johan
    Sofia Johan, LL.B (Liverpool), LL.M. in International Economic Law (Warwick), Ph.D. in Law and Economics (Tilburg), is an Assistant Professor of Finance and Fellow, Phil Smith Center for Free Enterprise, at the College of Business, Florida Atlantic University. She is also the AFM Senior Research Fellow at the Tilburg Law and Economics Centre (TILEC) in The Netherlands. Her research is primarily focused on law and finance, market surveillance, hedge funds, venture capital, private equity and IPOs. Her recent publications have appeared in numerous journals including the Journal of Financial Economics, Journal of International Business Studies, American Law and Economics Review, International Review of Law and Economics, Journal of Banking and Finance, European Financial Management, European Economic Review, and Entrepreneurship Theory and Practice, among numerous other journals. Her work has been presented at the American Law and Economics Association, the American Economics Association, European Law and Economics Association, the European Financial Management Association, and other leading international conferences. Prior to winning her Ph.D., she was the head legal counsel at the largest government owned venture capital fund in Malaysia. She has also consulted for a variety of governmental and private organizations in Australasia and Europe. http://ssrn.com/author=370203

    Affiliations and Expertise

    Assistant Professor of Finance, College of Business, Florida Atlantic University - Boca Raton, FL, USA

    Latest reviews

    (Total rating for all reviews)

    • Adeline K. Mon May 14 2018

      Venture Capital and Private Equity Contracting

      Excellent book! It is an easy read and yet, gives all the essential information about the industry. I really utilized it to the max for my Venture Capital and Private Equity course. There is no other source like this. Highly recommended it.

    • Adeline K. Thu Feb 01 2018

      Great textbook ever

      I bought this book for my Venture Capital and Private Equity course. I love it. Highly recommend it for students and professionals of all levels. It explained everything in a very precise and exciting manner; it motivated me to do well in the course. Thanks!

    • Giuliano V. Fri Jan 26 2018

      Venture Capital and Private Equity Contracting

      It is an excellent book