The Role of Contract Framing in Venture Capital Coller Institute of Venture 2015 Research Grant, awarded to Jennifer Kuan, Lyda Bigelow, Kyle Mayer and Robert Wuebker of Stanford University

Jennifer Kuan received her PhD from the University of California-Haas School of Business and is currently at the Stanford Institute of Economic Policy Research at Stanford University. Her work applies economic theory and empirical analysis to understand the hidden logic of how industries and firms are organized. Studies have examined innovation inside small- to medium-sized firms and the role of hierarchy in technology adoption and economic development. The incentives of nonprofit organizations have also been studied in a variety of industries including performing arts, stock exchanges, hospitals and software, with implications for firm governance, strategy and performance. Current research on venture capital explores network organization of investors and the emergence of the network in its early days.

This project undertakes an analysis of “contract framing” used in venture capital funding contracts. It is widely known among venture capitalists and their lawyers that contracts with entrepreneurs can take one of two forms, a “West Coast” contract that is substantially the shorter of the two and written in relatively informal style, and an “East Coast” contract that is longer and contains more formal legal language. The scholarly literature hardly mentions this variation in contracting style, and instead analyzes variation in term sheet provisions and IPO prospectuses because full contracts are hard to obtain. One question is whether different contracting styles reflect differences in “contract framing”, i.e., whether contracts are prevention- or promotion-framed. Prevention framing is common in contracting, and emphasizes error avoidance, whereas promotion framing emphasizes exploration and experimentation. In a VC setting, where innovation is important for a positive outcome, contract framing could affect entrepreneurial success. This project seeks to gain access to at least a small sample of contracts for analysis, and possibly a larger, systematic sample for statistical analysis.