Hands-Tying Contracts: Book Publishing, Venture Capital Financing, and Secured Debt

Abstract

It is common practice in the publishing industry for a publisher to agree to print a well-established author's next book long before it is written-often, indeed, before the author has more to show than a one- or two-page prospectus. What is more, these agreements commonly award the author a large advance against prospective royalties and occasionally commit the publisher as well to a large promotion budget or first printing. Such contracts raise an obvious question: Why do publishers not wait until they have read and evaluated the completed manuscript before committing themselves to invest heavily in its publication? Nor is the publishing industry the only arena in which investors leap before they look. Venture capitalists often leave voting control over a start-up firm with an entrepreneur who invests relatively little money of his own. Similarly, limited partners in a venture capital fund often commit themselves in advance to invest in all the fund's future projects rather than reserve the right to evaluate those projects after the fund's managers have proposed them.