The Dynamics of Venture Capital Contracts

Abstract

In this paper, we analyze staging and its different modes in venture capital contracts. We interpret staging as a conscious decision for the introduction of renegotiation. Thereby, the renegotiation process can be designed in different ways as seen by the choice between milestone and round financing. We use a hand-collected sample of 464 investment rounds into 290 entrepreneurial firms from German venture capital contracts and and that risk and differences in information increase the probability for staging, while the different modes of staging crucially depend upon the allocation of bargaining power and the information structure.

Keywords: Venture capital, staging, corporate governance, moral hazard, renegotiation, contract theory

JEL Classification: G24, G32, G34