This Article has two main components: methodological and substantive. Methodologically, it develops a new way of measuring and coding the financial impact of contractual, statutory, and regulatory variables through Monte Carlo simulations. The simulation approach develops a measure of value by putting a hypothetical party in a realistic environment and asking how much this party stands to gain or lose from particular contractual or legal provisions.
Substantively, this Article studies default provisions in venture capital partnership agreements. It tests whether the extent to which venture capital funds lock in their equity capital is related to the level of agency costs. I find that the degree of capital lock-in is inversely related to several measures of expected agency costs. Better venture organizations (proxied by past investment outcomes) lock up investors’ capital more tightly, as do funds where managers’ compensation is more heavily based on performance and funds that employ alternative governance devices. Looking beyond venture capital funds, this evidence is not consistent with theoretical suggestions that strong equity capital lock-in by firms is generally desirable, and suggests that the optimal degree of equity capital lock-in depends on balancing the firm’s need for stable capital against the need to limit agency costs between managers and investors.
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