VC Contract Design: Development State, Bargaining Power, and the Classification of Early-Cycle Companies

Abstract

Private equity shareholder agreements are essential to the successful relationship between venture capital (VC) providers and recipients and are structured to balance the interests and objectives of both parties. However, these contracts are complex and contain a broad range of design options. The authors propose a model to classify early-cycle companies into four groups according to two dimensions: bargaining power and development state. Their survey of VC providers suggests most VC contracts include a core set of standardized investor rights. Additionally, there are varying rights according to the degree of bargaining power and development state, preserving contract flexibility to accommodate a range of investment prospects.

TOPICS: Private equity, legal/regulatory/public policy, quantitative methods, portfolio construction