Established Firms Versus Venture Capital - The Handling of Financial Contracts - A Case Study

Abstract

Background An extensive amount of theoretical research has been undertaken within the field of financial contracting however empirical studies are less common. One of the most prominent empirical studies was performed by Kaplan and Strömberg (2003). Their work tested existing contracting theory against the actual contracts written in 213 venture capital financings. Purpose The purpose of this report is to compare an established firm’s contract with that of a venture capital firm who have both faced the same investment opportunity. Our research question is as follows: Will the financial contracts written by established firms and venture capitalists differ when facing the same investment opportunity? Method This thesis involves a ‘unique’ and ‘revelatory’ case study (Yin, 2003). We analyse the contracts with the theoretical framework offered by Kaplan and Strömberg (2003) in order to identify the allocation of cash flow rights, board rights, voting rights, liquidation rights and other control rights. We later compare the contracts with each other based on how each contract has chosen to allocate those rights. Conclusion The established firm and the venture capitalists contracts both correlate well with Kaplan and Strömberg’s (2003) empirical study. The contracts also show many similarities to each other although some differences exist in how the established firms and venture capitalists choose to allocate cash flow rights.