Venture Capital and Private Equity Contracting - 2nd Edition - ISBN: 9780124095373, 9780124095960

Venture Capital and Private Equity Contracting

2nd Edition

An International Perspective

Authors: Douglas Cumming Sofia Johan
eBook ISBN: 9780124095960
Hardcover ISBN: 9780124095373
Imprint: Elsevier
Published Date: 29th August 2013
Page Count: 780
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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

Details

No. of pages:
780
Language:
English
Copyright:
© Elsevier 2014
Published:
Imprint:
Elsevier
eBook ISBN:
9780124095960
Hardcover ISBN:
9780124095373

About the Author

Douglas Cumming

Douglas Cumming, J.D., Ph.D., CFA, is a Professor of Finance and Entrepreneurship and the Ontario Research Chair at the Schulich School of Business, York University. His research interests include venture capital, private equity, hedge funds, entrepreneurship, and law and finance. He is a Co-Editor of Entrepreneurship Theory and Practice, and has been a guest editor for 12 special issues of top journals. He has published over 90 articles in leading refereed academic journals in finance, management, and law and economics, such as the 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 Economist, Canadian Business, the National Post, and The New Yorker. He is a research associate with the Bocconi University Paolo Baffi Center for Central Banking and Financial Regulation (Milan), Groupe d'Economie Mondiale at Sciences Po (Paris), Capital Markets CRC (Sydney), Venture Capital Experts (New York), Cambridge University ESRC Center for Business Research (Cambridge UK), Center for Financial Studies (Frankfurt), Amsterdam Center for Research in International Finance, and the University of Calgary Van Horne Institute. He has also consulted for a variety of governmental and private organizations in Australasia, Europe and North America. Much of Douglas Cumming’s work is online at SSRN: http://ssrn.com/author=75390

Affiliations and Expertise

Schulich School of Business, York University, Canada

Sofia Johan

Sofia Johan, LL.B (Liverpool), LL.M. in International Economic Law (Warwick), Ph.D. in Law and Economics (Tilburg), is the AFM Senior Research Fellow at the Tilburg Law and Economics Centre (TILEC) in The Netherlands and Adjunct Professor of Law and Finance at the Schulich School of Business, York University. Her research is primarily focused on law and finance, market surveillance, hedge funds, venture capital, private equity and IPOs. 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. 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. 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

AFM Senior Research Fellow, Tilburg Law and Economics Centre (TILEC), The Netherlands and Adjunct Professor of Law and Finance, Schulich School of Business, York University, Canada