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The dynamics of venture capital contracts

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  • Bienz, Carsten
  • Hirsch, Julia

Abstract

We analyze the degree of contract completeness with respect to staging of venture capital investments using a hand-collected German data set of contract data from 464 rounds into 290 entrepreneurial firms. We distinguish three forms of staging (pure milestone financing, pure round financing and mixes). Thereby, contract completeness reduces when going from pure milestone financing via mixes to pure round financing. We show that the decision for a specific form of staging is determined by the expected distribution of bargaining power between the contracting parties when new funding becomes necessary and the predictability of the development process. To be more precise, parties choose the more complete contracts the lower the entrepreneur’s expected bargaining power - the maximum level depending on the predictability of the development process. --

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Bibliographic Info

Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2006/11.

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Date of creation: 2005
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Handle: RePEc:zbw:cfswop:200611

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Related research

Keywords: Venture Capital; Corporate Governance; Moral Hazard; Renegotiation; Contract Theory; Empirical Contract Theory; Contract Econometrics;

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References

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  1. Georg Nöldeke & Klaus M. Schmidt, 1992. "Option Contracts and Renegotiation - A Solution to the Hold-Up Problem," Discussion Paper Serie A 417, University of Bonn, Germany, revised Aug 1993.
  2. Kaplan, Steven & Strömberg, Per Johan, 2002. "Characteristics, Contracts and Actions: Evidence from Venture Capitalist Analyses," CEPR Discussion Papers 3243, C.E.P.R. Discussion Papers.
  3. Gil, Ricard, 2006. "Renegotiation, Learning and Relational Contracting," CEI Working Paper Series 2005-14, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  4. Rajan, Raghuram G, 1992. " Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-400, September.
  5. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Econometrica, Econometric Society, vol. 62(2), pages 257-82, March.
  6. Gompers, Paul A, 1995. " Optimal Investment, Monitoring, and the Staging of Venture Capital," Journal of Finance, American Finance Association, vol. 50(5), pages 1461-89, December.
  7. Bottazzi, L. & Da Rin, M. & Hellmann, T., 2004. "The changing face of the European venture capital industry: Facts and analysis," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3106559, Tilburg University.
  8. Jochen Bigus, . "Staging of Venture Financing, Moral Hazard, and Patent Law," German Working Papers in Law and Economics 2002-1-1044, Berkeley Electronic Press.
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Citations

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Cited by:
  1. Dirk Bergemann & Ulrich Hege & Liang Peng, 2008. "Venture Capital and Sequential Investments," Cowles Foundation Discussion Papers 1682R, Cowles Foundation for Research in Economics, Yale University, revised Mar 2009.
  2. Carsten Bienz & Uwe Walz, 2006. "Evolution of decision and control rights in venture capital contracts: an empirical analysis," LSE Research Online Documents on Economics 24637, London School of Economics and Political Science, LSE Library.
  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).
  4. Julia Hirsch & Uwe Walz, 2013. "Why do contracts differ between venture capital types?," Small Business Economics, Springer, vol. 40(3), pages 511-525, April.
  5. Da Rin, M. & Hellmann, T. & Puri, M.L., 2011. "A Survey of Venture Capital Research," Discussion Paper 2011-111, Tilburg University, Center for Economic Research.
  6. Uwe Walz & Carsten Bienz, 2006. "Evolution of Decision and Control Rights in Venture Capital Contracts: An Empirical Analysis," FMG Discussion Papers dp585, Financial Markets Group.

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