Covenants in Venture Capital Contracts
(2011) In Management Science 57(11). p.1926-1943- Abstract
- This paper studies how covenants are included in contracts between venture capitalists (VCs) and entrepreneurs. I show that VCs hold covenanted veto rights even though they are shareholders who have access to other powerful governance solutions. Unlike bank loans and bonds, venture capital (VC) contracts exhibit considerable variation in their contractual designs. I exploit this variation to confirm the argument that covenants are in place to overcome a conflict of interest that arises from debt-like contractual features of a venture capitalist's preferred stock. In particular, I find that contracts with higher fixed payoffs include 1.6 more covenants than do contracts with lower fixed payoffs. Similarly, VC contracts with no VC board... (More)
- This paper studies how covenants are included in contracts between venture capitalists (VCs) and entrepreneurs. I show that VCs hold covenanted veto rights even though they are shareholders who have access to other powerful governance solutions. Unlike bank loans and bonds, venture capital (VC) contracts exhibit considerable variation in their contractual designs. I exploit this variation to confirm the argument that covenants are in place to overcome a conflict of interest that arises from debt-like contractual features of a venture capitalist's preferred stock. In particular, I find that contracts with higher fixed payoffs include 1.6 more covenants than do contracts with lower fixed payoffs. Similarly, VC contracts with no VC board majority requirement include 0.6 more covenants than do contracts that require a VC board majority. Covenants are also more common with older companies and when fewer VCs invest in a round. My findings contribute to both the debt covenant literature and the entrepreneurial finance literature. (Less)
Please use this url to cite or link to this publication:
https://lup.lub.lu.se/record/3629048
- author
- Bengtsson, Ola LU
- organization
- publishing date
- 2011
- type
- Contribution to specialist publication or newspaper
- publication status
- published
- subject
- keywords
- Finance, Venture Capital, Contracts, Entrepreneurship
- categories
- Popular Science
- in
- Management Science
- volume
- 57
- issue
- 11
- pages
- 1926 - 1943
- publisher
- INFORMS Institute for Operations Research and the Management Sciences
- external identifiers
-
- scopus:81255178487
- ISSN
- 0025-1909
- language
- English
- LU publication?
- yes
- id
- 7a0bc30e-5ac8-4402-9f3f-1a53465500fc (old id 3629048)
- alternative location
- http://ejscontent.ebsco.com/ContentServer.aspx?target=http%3A%2F%2Fmansci.journal.informs.org%2Fcgi%2Freprint%2F57%2F11%2F1926.pdf
- date added to LUP
- 2016-04-01 10:24:46
- date last changed
- 2025-04-07 20:55:04
@misc{7a0bc30e-5ac8-4402-9f3f-1a53465500fc,
abstract = {{This paper studies how covenants are included in contracts between venture capitalists (VCs) and entrepreneurs. I show that VCs hold covenanted veto rights even though they are shareholders who have access to other powerful governance solutions. Unlike bank loans and bonds, venture capital (VC) contracts exhibit considerable variation in their contractual designs. I exploit this variation to confirm the argument that covenants are in place to overcome a conflict of interest that arises from debt-like contractual features of a venture capitalist's preferred stock. In particular, I find that contracts with higher fixed payoffs include 1.6 more covenants than do contracts with lower fixed payoffs. Similarly, VC contracts with no VC board majority requirement include 0.6 more covenants than do contracts that require a VC board majority. Covenants are also more common with older companies and when fewer VCs invest in a round. My findings contribute to both the debt covenant literature and the entrepreneurial finance literature.}},
author = {{Bengtsson, Ola}},
issn = {{0025-1909}},
keywords = {{Finance; Venture Capital; Contracts; Entrepreneurship}},
language = {{eng}},
number = {{11}},
pages = {{1926--1943}},
publisher = {{INFORMS Institute for Operations Research and the Management Sciences}},
series = {{Management Science}},
title = {{Covenants in Venture Capital Contracts}},
url = {{http://ejscontent.ebsco.com/ContentServer.aspx?target=http%3A%2F%2Fmansci.journal.informs.org%2Fcgi%2Freprint%2F57%2F11%2F1926.pdf}},
volume = {{57}},
year = {{2011}},
}