Principal Agents in Venture Capital and Private Equity Contracting

Seminar paper from the year 2005 in the subject Business economics - Banking Stock Exchanges Insurance Accounting grade: 10 Technical University of Darmstadt (Department of Banking and Finance) course: Venture Capital and Private Equity language: English abstract: In the last decades venture capital has emerged as the major source of financing for young and innovative firms replacing more and more bank credits but also creating a new market niche for start-ups with a high risk of failure that may create substantial returns. With success stories of companies like Apple Computer Intel Federal Express Microsoft Sun Mircosystem Compaq or SAP this form of funding is meanwhile widely accepted. In the late 1970s the venture capital industry increased dramatically in the United States. In contrast the venture capital sector in continental Europe used to be a very small market up to 1990. Figure 1 in the appendix shows the development of funds committed to independent US and European venture capital funds.1Today the venture fund market in Germany has reached a managed fund size of US$ 43 billion an increase of 13.2 percent in regard to the previous year.2Therefore venture capital plays a crucial role in respect to innovation of an economy and has significant positive effects on society and a country's economy.According to Sahlmann (1990) the term venture capital is defined as a professional managed pool of capital that is invested in equity linked securities of private ventures at various stages in their development. Gompers and Lerner (2001a) limit the definition to investments in privately held high growth companies. Originally the intent of venture capital is to finance young innovative companies. The term private equity describes the investment of equity in companies that are already established e.g. companies in later stages of their life cycle. Today the two terms are often used as synonyms.In this paper we keep focusing on companies in earl