Abstract
Firms are defined by their nexus of contracts. Although VC funds are financial intermediaries, their structure and their mode of operations is determined by a nexus of explicit and implicit contracts between those who provide the necessary inputs to VC funds. Like any other firms, VC funds are comprised of assets and liabilities. The liabilities of VC funds are equity transferred from savers through LPs; the assets are investments in young companies based on radical ideas in technology. Three basic contracts define how much capital VC funds invest, in what type of projects they invest, and how the return on the investment is allocated between entrepreneurs, GPs and LPs. These three contracts are the contract that defines the VC fund, the contract between the VC fund (the GP) and the entrepreneurs, and the contract between the LPs and the GP.
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