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Deal Terms Effect on Deal Pricing in a Venture Capital Context

Schmidt, Maximilian LU and Skjefstad, Kerstin (2013) NEKN02 20131
Department of Economics
Abstract
This thesis aims to develop the research focused on the economic value of deal terms in venture capital (VC) contracts. The study looks at common features (covenants) in a Venture Capital contract such as preferred equity, ceased participation, liquidation preference, and dividends. Different deal terms (covenants) and their outcomes for the VC are tested in order to examine if significantly different results, due to different deal terms, can be detected in deal pricing depending on different contract terms. Venture capital firms in the US almost exclusively invest in preferred equity therefore the study will focus on this type of equity. The main focus of the thesis will be on the pricing implications of the deal terms. However, a brief... (More)
This thesis aims to develop the research focused on the economic value of deal terms in venture capital (VC) contracts. The study looks at common features (covenants) in a Venture Capital contract such as preferred equity, ceased participation, liquidation preference, and dividends. Different deal terms (covenants) and their outcomes for the VC are tested in order to examine if significantly different results, due to different deal terms, can be detected in deal pricing depending on different contract terms. Venture capital firms in the US almost exclusively invest in preferred equity therefore the study will focus on this type of equity. The main focus of the thesis will be on the pricing implications of the deal terms. However, a brief analysis of agency cost and information asymmetry is also present since this aspect is a known issue in new ventures at seed stage. The analysis is focused on wealth transfer between the VC and the entrepreneur rather than contract theory and only models the payoffs different implications and interactions. Therefore, it criticizes previous academic research that focus on contract theory only. We predict that we will find significant results in difference in economic value between different deal terms. Previous research by Woronoff and Rosen 2005 has shown that legal terms in VC contracts can significantly affect the distribution of value among various interested parties upon exit, and suggest that it should therefore be quantified at the outset of the investment relationship. Onimus and Gensheimer observed that the contract can affect the VC ́s share at exit by up to 70% and this is one of the main approaches to this study, how much does the contract matter? The thesis will also examine the dynamics of stage financing effects on deal pricing implications. Therefore, we choose to continue the research and challenge the idea that the deal terms might have different value. This could essentially advice venture capitalists and entrepreneurs in contract structuring in Venture Capital deals. The results will be concluding the thesis with a list of findings considerable in contract structuring. (Less)
Please use this url to cite or link to this publication:
author
Schmidt, Maximilian LU and Skjefstad, Kerstin
supervisor
organization
course
NEKN02 20131
year
type
H1 - Master's Degree (One Year)
subject
keywords
V enture Capital, Liquidations Preference, Dividend, Pricing implications, V enture Capital Valuation, Value Transfer, Contract Structuring
language
English
id
3802861
date added to LUP
2013-06-12 14:37:30
date last changed
2013-06-12 14:37:30
@misc{3802861,
  abstract     = {This thesis aims to develop the research focused on the economic value of deal terms in venture capital (VC) contracts. The study looks at common features (covenants) in a Venture Capital contract such as preferred equity, ceased participation, liquidation preference, and dividends. Different deal terms (covenants) and their outcomes for the VC are tested in order to examine if significantly different results, due to different deal terms, can be detected in deal pricing depending on different contract terms. Venture capital firms in the US almost exclusively invest in preferred equity therefore the study will focus on this type of equity. The main focus of the thesis will be on the pricing implications of the deal terms. However, a brief analysis of agency cost and information asymmetry is also present since this aspect is a known issue in new ventures at seed stage. The analysis is focused on wealth transfer between the VC and the entrepreneur rather than contract theory and only models the payoffs different implications and interactions. Therefore, it criticizes previous academic research that focus on contract theory only. We predict that we will find significant results in difference in economic value between different deal terms. Previous research by Woronoff and Rosen 2005 has shown that legal terms in VC contracts can significantly affect the distribution of value among various interested parties upon exit, and suggest that it should therefore be quantified at the outset of the investment relationship. Onimus and Gensheimer observed that the contract can affect the VC ́s share at exit by up to 70% and this is one of the main approaches to this study, how much does the contract matter? The thesis will also examine the dynamics of stage financing effects on deal pricing implications. Therefore, we choose to continue the research and challenge the idea that the deal terms might have different value. This could essentially advice venture capitalists and entrepreneurs in contract structuring in Venture Capital deals. The results will be concluding the thesis with a list of findings considerable in contract structuring.},
  author       = {Schmidt, Maximilian and Skjefstad, Kerstin},
  keyword      = {V enture Capital,Liquidations Preference,Dividend,Pricing implications,V enture Capital Valuation,Value Transfer,Contract Structuring},
  language     = {eng},
  note         = {Student Paper},
  title        = {Deal Terms Effect on Deal Pricing in a Venture Capital Context},
  year         = {2013},
}