Discussion Papers, Department of Finance and Management Science, Norwegian School of Economics (NHH)
No 2007/13:
Evolution of Decision and Control Rights in Venture Capital Contracts: An Empirical Analysis
Carsten Bienz ()
and Uwe Walz ()
Abstract: We analyze the structure and evolution of the allocation
of decision and control rights in venture capital contracts by using a
sample of 464 contracts between venture capitalists (VC) and portfolio
firms from Germany. We focus on the evolution of control and decisions
rights along three time dimensions: the point in time when the contract was
signed, the expected duration of the contract and the actual duration of
the relationship. We show that contracts are not static but that control
rights are adjusted along all three time dimensions. First, we observe a
change in the structure but not in the level of the VC’s control rights
during the relationship between the VC and the portfolio firm. While
venture capitalists return superfluous operational rights to entrepreneurs,
they gain (valuable) exit rights during the course of the relationship.
Second, we show that the shorter the expected length of the VC’s engagement
the more control rights are allocated to the hands of the VC. Finally, we
observe that learning took place in the German VC market.
Keywords: Venture capital; corporate governance; empirical contract theory; control rights; exit rights; (follow links to similar papers)
JEL-Codes: D80; D86; G24; G32; G34; (follow links to similar papers)
72 pages, March 27, 2007
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