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

Authors

  • Jens Burchardt,

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    • Jens Burchardt is Project Leader, Boston Consulting Group, Berlin, Germany.
  • Ulrich Hommel,

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    • Ulrich Hommel is Professor of Finance and Endowed Chair of Corporate Finance and Director of Strategic Finance Institute, Department of Finance, Accounting, EBS International University, 65189 Wiesbaden, Germany.
  • Dzidziso Samuel Kamuriwo,

    Corresponding author
    • Please send correspondence to: Dzidziso Samuel Kamuriwo, at Cass Business School, City University London, 106 Bunhill, Row, EC1Y 8TZ, London, United Kingdom.

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    • Dzidziso Samuel Kamuriwo is Lecturer in Strategy, Cass Business School, City University London, London EC1Y8TZ, UK.
  • Carolina Billitteri

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    • Carolina Billitteri is Industrial Engineer in the public health care sector, Casa di cure Orestano srl, Palermo, Italy.

  • The authors thank the editor, Douglas Cumming, and two anonymous reviewers for their helpful comments and guidance. All remaining errors are solely the authors’ responsibility.

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.

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