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Evolution of decision and control rights in venture capital contracts: an empirical analysis

Bienz, Carsten and Walz, Uwe (2006) Evolution of decision and control rights in venture capital contracts: an empirical analysis. Discussion paper, 585. Financial Markets Group, London School of Economics and Political Science, London, UK.

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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.

Item Type: Monograph (Discussion Paper)
Official URL: http://fmg.lse.ac.uk
Additional Information: © 2006 The Authors
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D80 - General
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: Theory
G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
G - Financial Economics > G2 - Financial Institutions and Services > G24 - Investment Banking; Venture Capital; Brokerage; Rating Agencies
G - Financial Economics > G3 - Corporate Finance and Governance > G34 - Mergers; Acquisitions; Restructuring; Corporate Governance
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Collections > LSE Financial Markets Group (FMG) Working Papers
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 585
Date Deposited: 29 Jul 2009 10:05
URL: http://eprints.lse.ac.uk/24637/

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