RT Journal Article
SR Electronic
T1 Practical Applications of The Role of Contracts in Venture Capital Returns
JF The Journal of Alternative Investments
FD Institutional Investor Journals
SP jai.2021.jaipa052
DO 10.3905/jai.2021.jaipa052
A1 Sarina Liu
YR 2021
UL https://pm-research.com/content/early/2022/01/27/jai.2021.jaipa052.abstract
AB In The Role of Contracts in Venture Capital Returns, published in the Fall 2021 issue of The Journal of Alternative Investments, Sarina Liu of Wells Fargo creates a novel dataset to empirically test the hypothesis that traditional methods overestimate the post-money value of startup firms. Data about contract terms display four general convertible preferred stock types that are often provided to venture capitalists (VCs). After combining the data on contract terms with two additional datasets, the author analyzes cash flows to the VCs, revealing several interesting statistics regarding early- and late-stage investors in small and large acquisitions for each of the four types of convertible preferred stocks. While possible outcomes include failures, acquisitions, or initial public offerings (IPOs), most involve small acquisitions. Importantly, the traditional method for estimating the post-money value is inaccurate because the assumption of using common stock does not capture the significant added value of preferred stock.