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Why do contracts differ between venture capital types?

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  • Julia Hirsch
  • Uwe Walz

Abstract

The main objective of the present paper is to investigate differences in the design of contracts between venture capitalists and their portfolio firms across venture capital (VC) types. By controlling for selection effects, we focus on contract design differences which reflect differences in corporate governance approaches across VC types. To address this issue, we use a unique, hand-collected German data set consisting of all contractual details of VC investments into 290 entrepreneurial firms in the period 1990–2004. By employing various matching procedures, we show that VC types differ in their corporate governance approach vis-à-vis their portfolio firms. It turns out that independent VCs, when compared to captive VCs, use significantly more contract mechanisms which induce active intervention. Copyright Springer Science+Business Media, LLC. 2013

Suggested Citation

  • Julia Hirsch & Uwe Walz, 2013. "Why do contracts differ between venture capital types?," Small Business Economics, Springer, vol. 40(3), pages 511-525, April.
    • Handle: RePEc:kap:sbusec:v:40:y:2013:i:3:p:511-525
    DOI: 10.1007/s11187-011-9388-6
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    References listed on IDEAS

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    Cited by:

    1. Wang, Lei & Zhou, Fangzhao & An, Yunbi, 2017. "Determinants of control structure choice between entrepreneurs and investors in venture capital-backed startups," Economic Modelling, Elsevier, vol. 63(C), pages 215-225.
    2. Hui Fu & Jun Yang & Yunbi An, 2019. "Contracts for venture capital financing with double-sided moral hazard," Small Business Economics, Springer, vol. 53(1), pages 129-144, June.
    3. Anita Lovas & János Pereczes & Viktória Rába, 2015. "Incentives and restrictions in venture capital contracts," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 14(3), pages 106-121.
    4. Xue Yang & Hao Zhang & Die Hu & Bingde Wu, 2023. "The timing dilemma: understanding the determinants of innovative startups’ patent collateralization for loans," Small Business Economics, Springer, vol. 60(1), pages 371-403, January.
    5. repec:cbh:journl:v:14:y:2015:i:3:p:106-121 is not listed on IDEAS

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    More about this item

    Keywords

    Venture capital; Corporate governance; Matching; Contract design; G24; G32; G34;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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