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Location Specific Styles and US Venture Capital Contracting

Author

Listed:
  • Ola Bengtsson

    (Knut Wicksell Centre for Financial Studies, Department of Economics, Lund University, P.O. Box 7082, S-220 07 Lund, Sweden)

  • S. Abraham Ravid

    (Sy Syms School of Business, Yeshiva University, 500 W. 185th St. New York, NY 10033, USA)

Abstract

This paper shows that several contractual equilibria coexist in the US venture capital (VC) contracts. Our database is larger than that of previous studies and includes 1,804 contracts. Our main finding is that California-based entrepreneurs receive less harsh contract terms. In particular, investors subject to California-based or California style contracts have less downside protection. This “California effect” remains large and significant even after we include all the previously discovered controls which determine contract design. We find a similar effect if the VC is located in California, or if a non-California VC had a large exposure to the California market. We do not find evidence that VCs are substituting cash flow contingencies for control rights or for performance-based CEO compensation contracts. We also document several other new contractual features of VC contracts. In particular, we find that better companies and more experienced VCs receive better contract terms, whereas older companies receive harsher contracts. We also confirm the role of concentration and proximity in financial contracts.

Suggested Citation

  • Ola Bengtsson & S. Abraham Ravid, 2015. "Location Specific Styles and US Venture Capital Contracting," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 5(03), pages 1-40, September.
    • Handle: RePEc:wsi:qjfxxx:v:05:y:2015:i:03:n:s2010139215500123
    DOI: 10.1142/S2010139215500123
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    2. William Gornall & Ilya A. Strebulaev, 2017. "Squaring Venture Capital Valuations with Reality," NBER Working Papers 23895, National Bureau of Economic Research, Inc.
    3. Oleg Muratov, 2023. "Entrepreneur–Investor Information Design," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(4), pages 1431-1467, November.
    4. TIAN, Xiaoli & KOU, Gang & ZHANG, Weike, 2020. "Geographic distance, venture capital and technological performance: Evidence from Chinese enterprises," Technological Forecasting and Social Change, Elsevier, vol. 158(C).
    5. Oleg Muratov, 2020. "Entrepreneur-Investor Information Design," Diskussionsschriften dp2014, Universitaet Bern, Departement Volkswirtschaft.

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