Other books present corporate finance approaches to the VC/PE industry, but many key decisions require an understanding of the ways that law and economics work together. This book is better than straight corporate finance textbooks because it offers broad perspectives and principles that enable readers to deduce the economic implications of specific contract terms. This approach avoids the common pitfalls of implying that contractual terms apply equally to firms in any industry anywhere in the world. This book explores the economic implications of contract terms for start-up firms in various industries. It pairs international data with explanations and examples about differences in VC and PE national and regional markets. It contains sample contracts, including limited partnership agreements, term sheets, shareholder agreements, and subscription agreements. It presents international datasets on limited partnership agreements between institutional investors and VC and PE funds.
Pt. 1 Introduction 1
1 Introduction and Overview 3
2 Overview of Agency Theory 27
3 Overview of Institutional Contexts, Empirical Methods 51
Pt. 2 Fund Structure and Governance 67
4 What Should Fund Managers Care About? Perspectives from Institutional Investors 69
5 Limited Partnership Agreements 93
6 Compensation Contracts 129
7 Fundraising and Regulation 163
8 Specialized Investment Mandates 207
9 The Role of Government and Alternative Policy Options 241
Pt. 3 Financial Contracting between Funds and Entrepreneurs 281
10 The Investment Process 283
11 Security Design 297
12 Security Design and Adverse Selection 359
13 Corporate Venture Capital Fund Contracts 389
14 Preplanned Exits and Contract Design 409
Pt. 4 Investor Effort 449
15 Investor Value-added 451
16 Contracts and Effort 459
17 Home Bias 503
18 Portfolio Size 533
Pt. 5 Divestment 581
19 The Divestment Process 583
20 Exit Outcomes 599
21 Contracts and Exits 649
22 Valuation, Returns, and Disclosure 699
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