Advanced Search
MyIDEAS: Login to save this paper or follow this series

Evolution of Decision and Control Rights in Venture Capital Contracts: An Empirical Analysis

Contents:

Author Info

  • Bienz, Carsten

    ()
    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

  • Walz, Uwe

    ()
    (Fachbereich Wirtschaftswissenschaften, Lehrstuhl für Volkswirtschaftslehre, insb. Industrieökonomie, Johann Wolfgang Goethe-Universität)

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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nhh.no/for/dp/2007/1307.pdf
Our checks indicate that this address may not be valid because: 404 Not Found. If this is indeed the case, please notify (Stein Fossen)
Download Restriction: no

Bibliographic Info

Paper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2007/13.

as in new window
Length: 72 pages
Date of creation: 27 Mar 2007
Date of revision:
Handle: RePEc:hhs:nhhfms:2007_013

Contact details of provider:
Postal: NHH, Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
Phone: +47 55 95 92 93
Fax: +47 55 95 96 50
Email:
Web page: http://www.nhh.no/en/research-faculty/department-of-business-and-management-science.aspx
More information through EDIRC

Related research

Keywords: Venture capital; corporate governance; empirical contract theory; control rights; exit rights;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Thomas Hellmann, 1998. "The Allocation of Control Rights in Venture Capital Contracts," RAND Journal of Economics, The RAND Corporation, vol. 29(1), pages 57-76, Spring.
  2. Josh Lerner & Antoinette Schoar, 2005. "Does Legal Enforcement Affect Financial Transactions? The Contractual Channel in Private Equity," The Quarterly Journal of Economics, MIT Press, vol. 120(1), pages 223-246, January.
  3. Oliver Hart & John Moore, 1997. "Default and Renegotiation: A Dynamic Model of Debt," NBER Working Papers 5907, National Bureau of Economic Research, Inc.
  4. Kaplan, Steven & Strömberg, Per Johan, 2000. "Financial Contracting Theory Meets The Real World: An Empirical Analysis Of Venture Capital Contracts," CEPR Discussion Papers 2421, C.E.P.R. Discussion Papers.
  5. Thomas Hellmann & Manju Puri, 2002. "Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence," Journal of Finance, American Finance Association, vol. 57(1), pages 169-197, 02.
  6. Oliver Hart & John Moore, 1985. "Incomplete Contracts and Renegotiation," Working papers 367, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Julia Hirsch & Carsten Bienz, 2005. "The Dynamics of Venture Capital Contracts," FMG Discussion Papers dp552, Financial Markets Group.
  8. Steven N. Kaplan & Per Stromberg, 2002. "Characteristics, Contracts, and Actions: Evidence from Venture Capitalist Analyses," NBER Working Papers 8764, National Bureau of Economic Research, Inc.
  9. Hart, Oliver D. & Moore, John, 1990. "Property Rights and the Nature of the Firm," Scholarly Articles 3448675, Harvard University Department of Economics.
  10. Klaus Schmidt, 1999. "Convertible Securities and Venture Capital Finance," CESifo Working Paper Series 217, CESifo Group Munich.
  11. Steven N. Kaplan & Frederic Martel & Per Stromberg, 2003. "How Do Legal Differences and Learning Affect Financial Contracts?," NBER Working Papers 10097, National Bureau of Economic Research, Inc.
  12. Philippe Aghion & Jean Tirole, 1994. "Normal and Real Authority in Organizations," Working papers 94-13, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. Neher, Darwin V, 1999. "Staged Financing: An Agency Perspective," Review of Economic Studies, Wiley Blackwell, vol. 66(2), pages 255-74, April.
  14. Grossman, Sanford J & Hart, Oliver, 1985. "The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration," CEPR Discussion Papers 70, C.E.P.R. Discussion Papers.
  15. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
  16. Oliver Hart & John Moore, 1991. "A Theory of Debt Based on the Inalienability of Human Capital," STICERD - Theoretical Economics Paper Series /1991/233, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  17. Hellmann, Thomas F., 2002. "IPOs, Acquisitions and the Use of Convertible Securities in Venture Capital," Research Papers 1702r, Stanford University, Graduate School of Business.
  18. Chemla, Gilles & Habib, Michel Antoine & Ljungqvist, Alexander P, 2002. "An Analysis of Shareholder Agreements," CEPR Discussion Papers 3457, C.E.P.R. Discussion Papers.
  19. Schindele, Ibolya, 2004. "Advice and Monitoring: Venture Financing with Multiple Tasks," SIFR Research Report Series 29, Institute for Financial Research.
  20. Kaplan, Steven N. & Martel, Frederic & Stromberg, Per, 2007. "How do legal differences and experience affect financial contracts?," Journal of Financial Intermediation, Elsevier, vol. 16(3), pages 273-311, July.
  21. Schmidt, Klaus M., 2003. "Convertible Securities and Venture Capital Finance," Munich Reprints in Economics 19769, University of Munich, Department of Economics.
  22. Bascha, Andreas & Walz, Uwe, 2002. "Financing practices in the German venture capital industry: An empirical assessment," CFS Working Paper Series 2002/08, Center for Financial Studies (CFS).
  23. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
  24. Inderst, Roman & Muller, Holger M., 2004. "The effect of capital market characteristics on the value of start-up firms," Journal of Financial Economics, Elsevier, vol. 72(2), pages 319-356, May.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Arcot, Sridhar, 2014. "Participating convertible preferred stock in venture capital exits," Journal of Business Venturing, Elsevier, vol. 29(1), pages 72-87.
  2. Armin Schwienbacher, 2008. "Venture capital investment practices in Europe and the United States," Financial Markets and Portfolio Management, Springer, vol. 22(3), pages 195-217, September.
  3. Hirsch, Julia & Walz, Uwe, 2006. "Why do contracts differ between VC types? Market segmentation versus corporate governance varieties," CFS Working Paper Series 2006/12, Center for Financial Studies (CFS).

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:hhs:nhhfms:2007_013. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Stein Fossen).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.