Lawyers in Venture Capital Contracting: Theory and Evidence
(2014) In Economic Inquiry 52(3). p.1080-1102- Abstract
- Real-world financial contracts are sometimes so complex that it can be difficult to understand their exact payoff consequences. We develop and test a theoretical model of a venture capitalist (VC) negotiating with an entrepreneur who may overweigh or underweigh the payoff consequences of contractual downside protection (DP). A lawyer with expertise in venture capital can inform the entrepreneur about these consequences, but less expert (but otherwise high quality) lawyers cannot. We determine how a VC's decision to include DP is affected by the expected quality of the entrepreneur's project, the entrepreneur's experience, and the VC expertise of his/her legal counsel. We show that the VC's incentive to include unnecessary DP declines in... (More)
- Real-world financial contracts are sometimes so complex that it can be difficult to understand their exact payoff consequences. We develop and test a theoretical model of a venture capitalist (VC) negotiating with an entrepreneur who may overweigh or underweigh the payoff consequences of contractual downside protection (DP). A lawyer with expertise in venture capital can inform the entrepreneur about these consequences, but less expert (but otherwise high quality) lawyers cannot. We determine how a VC's decision to include DP is affected by the expected quality of the entrepreneur's project, the entrepreneur's experience, and the VC expertise of his/her legal counsel. We show that the VC's incentive to include unnecessary DP declines in expected project quality. Indeed, for inexperienced entrepreneurs involved with high-quality projects, VCs prefer that the entrepreneur's counsel has VC expertise. This implies that, when negotiating with inexperienced entrepreneurs, VCs who invest in high-quality companies should be more likely to negotiate with entrepreneurs who employ lawyers with VC expertise. We document broad empirical support for the model, and provide evidence against competing explanations.(JEL L24, G24, K12, L14, L24) (Less)
Please use this url to cite or link to this publication:
https://lup.lub.lu.se/record/4174152
- author
- Bengtsson, Ola LU and Bernhardt, Dan
- organization
- publishing date
- 2014
- type
- Contribution to journal
- publication status
- published
- subject
- keywords
- Venture Capital, Contracting, Entrepreneurship, Finance
- in
- Economic Inquiry
- volume
- 52
- issue
- 3
- pages
- 1080 - 1102
- publisher
- Wiley-Blackwell
- external identifiers
-
- wos:000335992200008
- scopus:84899833863
- ISSN
- 1465-7295
- DOI
- 10.1111/ecin.12088
- language
- English
- LU publication?
- yes
- id
- 387fc39b-d53b-4c76-ad2e-79d40fead706 (old id 4174152)
- date added to LUP
- 2016-04-01 09:50:07
- date last changed
- 2022-01-25 17:07:30
@article{387fc39b-d53b-4c76-ad2e-79d40fead706,
abstract = {{Real-world financial contracts are sometimes so complex that it can be difficult to understand their exact payoff consequences. We develop and test a theoretical model of a venture capitalist (VC) negotiating with an entrepreneur who may overweigh or underweigh the payoff consequences of contractual downside protection (DP). A lawyer with expertise in venture capital can inform the entrepreneur about these consequences, but less expert (but otherwise high quality) lawyers cannot. We determine how a VC's decision to include DP is affected by the expected quality of the entrepreneur's project, the entrepreneur's experience, and the VC expertise of his/her legal counsel. We show that the VC's incentive to include unnecessary DP declines in expected project quality. Indeed, for inexperienced entrepreneurs involved with high-quality projects, VCs prefer that the entrepreneur's counsel has VC expertise. This implies that, when negotiating with inexperienced entrepreneurs, VCs who invest in high-quality companies should be more likely to negotiate with entrepreneurs who employ lawyers with VC expertise. We document broad empirical support for the model, and provide evidence against competing explanations.(JEL L24, G24, K12, L14, L24)}},
author = {{Bengtsson, Ola and Bernhardt, Dan}},
issn = {{1465-7295}},
keywords = {{Venture Capital; Contracting; Entrepreneurship; Finance}},
language = {{eng}},
number = {{3}},
pages = {{1080--1102}},
publisher = {{Wiley-Blackwell}},
series = {{Economic Inquiry}},
title = {{Lawyers in Venture Capital Contracting: Theory and Evidence}},
url = {{http://dx.doi.org/10.1111/ecin.12088}},
doi = {{10.1111/ecin.12088}},
volume = {{52}},
year = {{2014}},
}