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

  • 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)

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.

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File URL: http://hdl.handle.net/11250/164106
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Paper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2007/13.

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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
Web page: http://www.nhh.no/en/research-faculty/department-of-business-and-management-science.aspx
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  1. Klaus M. Schmidt, 2003. "Convertible Securities and Venture Capital Finance," Journal of Finance, American Finance Association, vol. 58(3), pages 1139-1166, 06.
  2. 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).
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  9. 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.
  10. Carsten Bienz & Julia Hirsch, 2011. "The Dynamics of Venture Capital Contracts," Review of Finance, European Finance Association, vol. 16(1), pages 157-195.
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  14. Hellmann, Thomas F. & Puri, Manju, 2000. "Venture Capital and the Professionalization of Start-up Firms: Empirical Evidence," Research Papers 1661, Stanford University, Graduate School of Business.
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  17. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
  18. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-58, December.
  19. Hart, Oliver D & Moore, John, 1988. "Incomplete Contracts and Renegotiation," Econometrica, Econometric Society, vol. 56(4), pages 755-85, July.
  20. 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.
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