|Research Paper 63|
Understanding the Economic Value of Legal Covenants in Investment Contracts:
A Real-Options Approach to Venture Equity Contracts
COSSIN - HEC-University of Lausanne, FAME and IMD
SALIASI - HEC-University of Lausanne and FAME
Click here to download a .pdf of this paper
early-stage high-technology growth-oriented companies is a challenge to current valuation methodologies.
This inability to come up with robust point estimates of value should not and does not lead to a breakdown
of market liquidity: instead, efforts are redirected towards the design of investment contracts which
materially skew the distribution of payoffs in favor of the venture investors. In effect, limitations
in valuation abilities are addressed by designing the investment contracts as baskets of real options
instead of linear payoff functions. This paper investigates four common features (covenants) of venture
capital investment contracts from a real option perspective, using both analytical solutions and numerical
analysis to draw inferences for a better understanding of contract features. The impact of the concept
for pricing issues, valuation negotiation and for contract design are considered. It is shown for example
how “contingent pre-contracting” for follow-up rounds is theoretically a better proposition than the
simple “rights of first refusal” commonly found in many contracts. We also provide for results (such
as timing of investments, length of rounds, choices of liquidation levels, conversion levels) that take
into account full interaction of the different features considered. We document some complex facts,
such as the concavity of the VC contract value depending on the amount invested at the different stages,
the actual share impact of the most common antidilution feature, some endogenous motivation for early
VC exits from otherwise performing companies, and stress overall the importance of a full analysis for
efficient contract negociation and understanding.
SFI Abend Seminar mit Dr. Jörg Osterrieder, Zurich
Thema: Algorithmischer Handel - ein Überblick aus der Sicht der Praxis
SFI Breakfast Seminar with Dr. Jörg Osterrieder, Zurich
Thema: Algorithmic Trading - The Rise of the Machines
11th Annual Meeting, Zurich
Topic: Sustainable Finance Moving Center Stage
From the industry for the industry: Certification for Bank Client Advisors
Asset Management Study Switzerland by zeb und SFI. Asset Management in Switzerland faces huge challenges.
Swiss Finance Institute has attributed its Outstanding Paper Award to “The Impact of Treasury Supply on Financial Sector Lending and Stability”, a research paper by Arvind Krishnamurthy of Stanford University and Annette Vissing-Jorgensen of the University of California Berkeley that studies how government debt crowds out financial sector short-term debt.
Swiss Finance Institute publishes the first comprehensive Swiss study on structured products. The most recent SFI White Paper sheds light on the performance, costs, and investments of structured products.
English version, German version, French version, Italian version
More press releases...
SFI in the news
EPFL: «Why Does Fast Loan Growth Predict Poor Performance for Banks?»
Article referring to how fast loan growth affects the banking sector (27.06.2016)
Schweizer Bank: «Kooperation bei der Kundenberater-Zertifizierung»
Article referring to the cooperation between Swiss Finance Institute, University of Zürich and CYP Association on Certification of Bank Client Advisors (01.07.2016)
L'Agefi: «Le nombre idéal d'ETF sur un marché»
Article referring to research insights by Prof. Semyon Malamud (02.06.2016)
Corriere del Ticino: «Pechino Le sfide della transizione cinese»
Article referring to an SFI seminar with Prof. Fabrizio Zilibotti (31.05.2016)
NZZ: «Strukturierte Produkte ein etablierter Portfolio-Baustein»
Article referring to structured products (19.05.2016)
20minuti: «All'USI per parlare di crescita economica cinese»
Article referring to SFI seminar with Prof. Fabrizio Zilibotti on China's economic growth (19.05.2016)
awp: «Drei Schweizer Bildungsinstitute lancieren Zertifizierung von Bankkundenberater»
Article referring to SFI's new launched Certification of Bank Client Advisors (17.05.2016)
More SFI in the news...