Contracting on the Streets, Agency Problems in Term Sheets: A Case Study on Financial Contracts in the Swedish Venture Capital Industry

Abstract: This paper studies how a Stockholm-based venture capital firm addresses principal-agent conflicts and other risks associated with startup investing through the design of its term sheets. We begin by providing a detailed review on the predictions of contract theory and proceed to assess its alignment with the term sheets in our sample. We find that the term sheets issued by our VC of study to a great extent align with the predictions of theory. However, we also discover disparities between theory and the real world. Most importantly, we find that the VC we study does not negotiate contingent control mechanisms to the extent predicted by theory, implying that the VC is less concerned with assuming control in bad states of the world than otherwise suggested.