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

54 Pages Posted: 1 Mar 2007

See all articles by Carsten Bienz

Carsten Bienz

Norwegian School of Economics (NHH)

Uwe Walz

Goethe University Frankfurt - Institute of Economics; Center For Financial Studies (CFS); Leibniz Institute for Financial Research SAFE

Date Written: December 2006

Abstract

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.

Keywords: venture capital, corporate governance, empirical contract theory, control rights, exit rights

JEL Classification: G24, G32, D86, D80, G34

Suggested Citation

Bienz, Carsten and Walz, Uwe, Evolution of Decision and Control Rights in Venture Capital Contracts: An Empirical Analysis (December 2006). Available at SSRN: https://ssrn.com/abstract=966155 or http://dx.doi.org/10.2139/ssrn.966155

Carsten Bienz (Contact Author)

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen
Norway

Uwe Walz

Goethe University Frankfurt - Institute of Economics ( email )

Postfach 81
D-60054 Frankfurt
Germany

Center For Financial Studies (CFS) ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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