Venture Capital Contracting in Theory and Practice: Implications for Entrepreneurship Research

Abstract

This article provides a comprehensive theoretical and empirical literature review of venture capital contracts. This outlines the differences between theoretical and practical uses of contract designs; that is, (1) how does the choice of securities give rise to different adverse selection problems in terms of attracting different types of entrepreneurial companies; how does the choice of securities in conjunction with cash flow and control rights provisions affect (2) the effort levels by the entrepreneur and the investor; and (3) ultimately affect entrepreneurial outcomes. This article highlights the major discrepancies between theory and practice and points out potential avenues for further research.