The Private Value of Entrepreneurial Control: Evidence from a Discrete Choice Experiment

Abstract

We study how much entrepreneurs value being in control over their ventures. Even though control and independence are widely believed to be an important reward to entrepreneurship, and despite the importance of control rights for venture capital contract design, it remains unknown how much entrepreneurs value being in control. In this article, we perform a discrete choice experiment with a sample of entrepreneurs in Germany to estimate the value of control in the setting of venture capital investment. In the experiment, participants choose between hypothetical investment offers that carry different equity stakes, control rights, and VC value-added activities. We find that entrepreneurs highly value control: entrepreneurs are willing to give up an additional 38% of equity shares to investors to avoid that the VC obtains a voting majority. We additionally estimate entrepreneurs' valuations of VC value-added activities. We find that these carry a premium, reaching 12% of equity when the investor offers market access support. Our findings hint that control requirements form important entry barriers for entrepreneurs to venture capital financing.

Keywords: Entrepreneurial Finance, Control Rights, Discrete Choice Experiment

JEL Classification: G24, G41