Incentives and restrictions in venture capital contracts

In venture capital markets, contracts between investors and enterprises stipulate special incentives and restrictions in order to address the occurrence of severe asymmetric information, to reduce investor risk, and to facilitate successful exits. The purpose of this paper is to provide an overview of the international literature on venture capital contracts with a primary focus on empirical aspects, and to compare the authors’ findings with the Hungarian practice as reflected in the questionnaire-based survey conducted among venture capital funds. We concentrated our research on management control rights, the application of convertible debt, cash flow rights, voting rights, and drag-along and tag-along rights. In the article we describe the key features of venture capital contracts, the characteristics of selected contract elements and their impact on corporate operations and the contracting parties. After the presentation of individual contract elements, we summarise the relevant empirical evidence of international papers and draw conclusions in light of the Hungarian contracting practice.