Scandinavian Working Papers in Economics

Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

No 2007/13: Evolution of Decision and Control Rights in Venture Capital Contracts: An Empirical Analysis

Carsten Bienz () and Uwe Walz ()
Additional contact information
Carsten Bienz: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway
Uwe Walz: Fachbereich Wirtschaftswissenschaften, Lehrstuhl für Volkswirtschaftslehre, insb. Industrieökonomie, Johann Wolfgang Goethe-Universität, Postal: Johann Wolfgang Goethe-Universität, Fachbereich Wirtschaftswissenschaften, Lehrstuhl für Volkswirtschaftslehre, insb. Industrieökonomie, Schumannstr. 60, 60325 Frankfurt/Main, Germany

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

JEL-codes: D80; D86; G24; G32; G34

72 pages, March 27, 2007

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