The Theory Behind the Course

Venture capital funds and private equity funds are investment firms, usually organized as partnerships, that invest in growth companies (in the case of venture capital) or established companies, or divisions of companies, that are perceived to be undervalued (in the case of private equity).  This course is organized around four ideas that are essential to understanding the venture capital and private equity industry.  These four ideas are: 

(1) the source of investment capital (institutional investors) differs from other areas of finance, creating a unique opportunity for regulatory flexibility,

(2) conditions of extreme uncertainty and risk require active intermediaries (venture capitalists and private equity professionals) to source and monitor investments,

(3) the pressure for rapid exit creates affects the design of the legal infrastructures employed to organize portfolio companies, and

(4) reputation often replaces or supplements contractual solutions. 

Overview

Module One examines the source of financial capital for the industry.  The investment capital for the venture capital and private equity industry comes primarily from institutional investors (esp. tax-exempt investors).  We will explore how the relevant regulatory schemes (tax, ERISA, securities) differ in this context. 

Module Two explores the central contracting problem of extreme uncertainty.  Venture capitalists and private equity professionals are active investors, aggressively sourcing and managing investments on behalf of their clients.  Compensation is designed to align their incentives as best as possible.   

Module Three turns to the legal infrastructure of the portfolio companies that venture capital funds and private equity funds invest in.  The pressure to exit investments rapidly affects the design of the legal infrastructure that companies use.

Module Four concludes the course by examining when reputation may serve as an effective substitute for, or supplement to, contractual solutions.  Repeat play is thought to be especially important in the venture capital context (and, to a lesser extent, in the private equity context).  We will also explore how firms create, shape or maintain their reputation with consumers and employees.

A Note on Entrepreneurship and Portfolio Companies

The course is designed to complement the Entrepreneurial Law Clinic at Colorado, which is currently taught by Brad Bernthal. As such, the course is designed to convey the key concepts and "big ideas" rather than pile on too much detail. Details are important, of course, but are more likely to stick when applied in a clinic or deal simulation setting.  

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