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Experience, contractual covenants and venture capitalists' responses to unmet expectations

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  • Annaleena Parhankangas
  • Hans Landström
  • D. Gordon Smith

Abstract

The focus of this paper is on the role of experience in situations where venture capital contracts are drafted and applied. Based on a study of 78 Nordic venture capitalists, it was found that investors with venture capital and business experience include more protective clauses in venture capital contracts than their inexperienced colleagues. However, experienced investors were less likely to exercise these rights. The only deviation from this pattern was prior exposure to conflicts, prompting the use of contractual rights and discouraging compromise and patience in problematic situations with entrepreneurs. It also seems that the content of the contract shapes investors' reactions to unmet expectations: control rights tend to promote ‘relational’ approaches to solving problems emanating in the venture capitalist-entrepreneur relationship, whereas exit rights seem to decrease the venture capitalist's willingness to compromise in the face of unmet expectations caused by the entrepreneur.

Suggested Citation

  • Annaleena Parhankangas & Hans Landström & D. Gordon Smith, 2005. "Experience, contractual covenants and venture capitalists' responses to unmet expectations," Venture Capital, Taylor & Francis Journals, vol. 7(4), pages 297-318, March.
    • Handle: RePEc:taf:veecee:v:7:y:2005:i:4:p:297-318
    DOI: 10.1080/13691060500120929
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    References listed on IDEAS

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    1. Steven N. Kaplan & Frederic Martel & Per Stromberg, 2003. "How Do Legal Differences and Learning Affect Financial Contracts?," NBER Working Papers 10097, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Claire Champenois & Michel Devigne & François-Régis Puyou, 2016. "How Can Venture Capitalists-Owner Managers Conflicts Be Managed? If You Want Peace, Agree to Keep the Peace," Post-Print hal-01398988, HAL.
    2. Cheng, Cheng & Schwienbacher, Armin, 2016. "Venture capital investors and foreign listing choices of Chinese companies," Emerging Markets Review, Elsevier, vol. 29(C), pages 42-67.
    3. Rohan Chinchwadkar & Rama Seth, 2018. "The Choice of Exit: Influence of Private Equity Investors and Buyout Entry," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 17(1_suppl), pages 1-26, April.

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