A Built Economy in Education, Sustainability and Regulation
Edited by Jean Bonnet, Marcus Dejardin and Antonia Madrid-Guijarro
Chapter 10: Venture Capital in Spain: An Analysis of Financial Contracts
M. Camino Ramón-Llorens and Ginés Hernández-Cánovas1 INTRODUCTION Once the venture capital investment has been made, entrepreneurs might have incentives to undertake opportunistic actions to favour their own utility functions to the detriment of the venture capitalists interests (Parhankangas et al., 2005). Entrepreneurs might not work hard to maximize the value of the company, or threaten to leave the company (hold-up) knowing that their presence is vital to the success of the project (Kaplan and Strömberg, 2004). An entrepreneur can also sell the right of control to a third party who can make decisions about the future of the firm opposed to the interests of the venture capitalist (trilateral bargaining) or window dress the balance sheet (Cumming, 2005). According to Sahlman (1990), Amit et al. (1998), Bergemann and Hege (1998), Hellmann (1998), Landström et al. (1998), Trester (1998) and Kaplan and Strömberg (2004), the agreements reached in the financial contract might help venture capitalists to monitor, control and solve these moral hazard problems.2 The venture capital contract defines the rights and responsibilities of the entrepreneur and venture capitalist (Landström et al., 1998), allowing the latter to control the firm, solve incentive problems (Admati and Pfleiderer, 1994; Amit et al., 1998; Hellman 1998) and manage the tensions or conflicts with the entrepreneur (Sahlman, 1990; Barney et al., 1994; Kaplan and Strömberg, 2003; Parhankangas et al., 2005). The venture capital contract has been widely studied outside Spain from different perspectives. Gompers (1997), Kaplan and...
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