Agency Costs, Institutions, Learning and Taxation in Venture Capital Contracting

Abstract

This paper introduces a dataset on forms of finance used in 12,363 Canadian and US venture capital and private equity financings of Canadian entrepreneurial firms from 1991 to 2003. The data comprise different types of venture capital institutions, including corporate, limited partnership, government and labour-sponsored funds, as well as US funds that invest in Canadian entrepreneurial firms. Unlike prior work with US venture capitalists financing US entrepreneurial firms, the data herein indicate convertible preferred equity has never been the most frequently used form of finance for either US or Canadian venture capitalists financing Canadian entrepreneurial firms, regardless of the definition of the term 'venture capital'. A syndication example and a simple theoretical framework are provided to show the non-robustness of prior theoretical work on optimal financial contracts in venture capital finance. Multivariate empirical analyses herein indicate (1) security design is a response to expected agency problems, (2) capital gains taxation affects contracts, (3) there are trends in the use of different contracts which can be interpreted as learning, and (4) market conditions affect contracts.