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The Journal of Private Equity

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

David Sonius, Rustin T. Yerkes and Katharina Westhues
The Journal of Private Equity Fall 2017, 20 (4) 36-46; DOI: https://doi.org/10.3905/jpe.2017.20.4.036
David Sonius
is a financial risk manager at the Flint Group in Frankfurt, Germany
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Rustin T. Yerkes
is an assistant professor of finance at the Samford University Brock School of Business in Birmingham, AL
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Katharina Westhues
is a business strategy project manager at the Otto Group in Hamburg, Germany
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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

  • © 2017 Institutional Investor, LLC
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The Journal of Private Equity: 20 (4)
The Journal of Private Equity
Vol. 20, Issue 4
Fall 2017
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VC Contract Design: Development State, Bargaining Power, and the Classification of Early-Cycle Companies
David Sonius, Rustin T. Yerkes, Katharina Westhues
The Journal of Private Equity Aug 2017, 20 (4) 36-46; DOI: 10.3905/jpe.2017.20.4.036

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VC Contract Design: Development State, Bargaining Power, and the Classification of Early-Cycle Companies
David Sonius, Rustin T. Yerkes, Katharina Westhues
The Journal of Private Equity Aug 2017, 20 (4) 36-46; DOI: 10.3905/jpe.2017.20.4.036
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  • Article
    • Abstract
    • THEORETICAL FOUNDATIONS
    • HOW ARE CONTRACT COMPONENTS DETERMINED?
    • CONTRACTUAL DESIGN
    • RESEARCH DESIGN AND METHODOLOGY
    • DATASET
    • ANALYTICAL METHODS
    • RESULTS
    • PRACTICAL APPLICATIONS AND CONCLUSION
    • APPENDIX A
    • ENDNOTE
    • REFERENCES
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