Financial Contracting in U.S. Venture Capital: Overview and Empirical Evidence

This article reviews the financial contracts that are used in U.S. venture capital (VC) equity investments. It first discusses the conceptual reasons why VC contracts form a good testing ground for theoretical arguments pertaining to the design of financial contracts. It then describes the overall design of VC contracts and explains some of the most common and economically important contract terms. For these purposes, it presents summary statistics on cash flow contingencies from a broad recent data set of 1,804 unique VC contracts, and on control rights from a recent data set of 182 contracts. It proceeds by discussing the empirical results pertaining to the allocation of cash flow and control rights in VC contracts. The article concludes by discussing directions for future research on VC contracts.