ANTECEDENTS AND CONSEQUENCES OF VENTURE CAPITAL CONTRACT DESIGN

 This dissertation studies the underexplored topic of contract design, emphasizing the cash flow, control and veto rights from the management perspective between the entrepreneurial venture and its investor, namely the venture capital investors. Cash flow rights are provisions that jointly determine the extent to which the VC receives a greater fraction of the startup’s cash flows. Depending on how these provisions are designed, it could protect VC’s interest, enabling the VC to capture more value at the expense of the entrepreneur. Control rights are determined by how much board seats VC and the entrepreneur agree to take. Board membership, by definition, provide directors with critical voting rights, enabling them to control venture’s strategy. Lastly, veto rights are negative covenants that protects VC’s interest by specifying what preferred shareholders (i.e., VCs) can stop an action from a venture. Across three empirical essays, I examine the antecedents and consequences of VC contract design. Certificate of incorporation is the key document (i.e., contract) signed and filed by the venture that establishes the rights, preferences, privileges, and restrictions of classes and series of the venture’s stock. By going over the contracts, I created a unique data set that contains detailed information about and exploit a unique research opportunity studying factors that influence the design of contracts and the strategic consequences of such contracts