In what follows, we will describe the data set in more detail and introduce the variables necessary for our regressions.
Firm Characteristics
First of all, we have information about the project and the respective portfolio company. The variable AGE represents the age of the firm when the corresponding financing round was closed.
The variable FINISHED PRODUCT indicates whether the firm has a product that can be sold. Moreover, we observe the firm’s industry: LIFE-SCIENCE, INTERNET, IT/TELECOM, TRADITIONAL HIGH-TECH INDUSTRIES and OTHER INDUSTRIES are all dummy vari-ables that indicate the project’s industry. The dummy GROWTH INDUSTRIES is a variable that indicates whether the firm’s industry is research intensive, that is whether it is a biotech, IT/telecoms or a traditional high-tech firm. Furthermore, we observe the firm’s development stage in each financing round. On the one hand, we know whether the firm has finished its product tests, if it already has a finished product, if the firm holds any patents or if it even has reference customers. On the other hand, we have information about the development stages as defined by the German Venture Capital Association. We distinguish seed and start-up firms and expansion and later stage firms: the dummy EARLY STAGE indicates whether the firm belongs to the first group (dummy equals one) or not (dummy equals zero). Furthermore, we often have the firms’ balance sheet data at the date of each financing round: we know if the firm has any revenues (if this is the case the dummy REVENUES takes value one) and whether its balance sheet is audited or not (if this is the case the dummy AUDITED BALANCE SHEET takes value one). We also know the size of the firm’s balance sheet. Moreover, the FIXED ASSET RATIO (FAR) indicates the ratio of fixed assets to balance sheet total whereby we use balance sheet data of the year preceding the year of closing of the corresponding financing round31. Finally, we know if the portfolio company has received funding from other investors apart from the VC we are looking at. We define a dummy OUTSIDE FINANCE that takes value one if the portfolio company has received bank, angel or other VC finance before the first round of VC financing we are looking at or if VC financing takes place via a syndicate of various VCs.
31As we have many missing values in our sample, we adopt the following procedure. For all firms in a first financing round with an age of less than one year at the date of contracting and an investment phase of seed or early, we set the fixed asset ratio to zero. If we lack information for higher rounds, we use the same ratio as in the round before. If this ratio is not available, we code both as missing value. Additionally, we do not resort to the preceding round in the case of second rounds where we coded the first round data to be zero.
Last but not least, we have information about the entrepreneurs running the portfolio firm.
We know whether we face a repeat entrepreneur, i.e. if any of the founders has already run a firm (this is captured by the dummy variable REPEAT ENTREPRENEUR). We also know whether any of the founders has a background in engineering, which we code as SCIENCE BACKGROUND. If any of the founders has a PhD or a degree above32, we code the variable RESEARCH DEGREE to take value one.
Investment Conditions
Second, we have information, about the investment conditions. We classify each VC according to his type into three categories named INDEPENDENT VC, PUBLIC VC and OTHER VCs. The latter category includes both bank(-dependent) and corporate VCs33. Additionally, we know whether the VC’s are specialized in specific industries or development stages. Moreover, we ob-serve the total amount invested, the financing instrument used and the timing of the investment.
The STAGING dummy captures whether the project is financed in several steps or not.
Also, we observe the year when the financing round is closed and define three time dummies.
PERIOD1 takes value one if the financing round was closed during the early period of relatively low venture capital activity, namely before 1998, PERIOD2 if it was closed during the boom, i.e.
between 1998 and 2000 and PERIOD3 if it was closed after 2000 - a period of relative decline and reorganization of the venture capital industry.
Voting and Control Rights
Most important of all we know the amount of voting rights the VC holds. We code this as VOT-ING RIGHTS/CASH-FLOW RIGHTS. We repeat the same exercise for the amount of voting rights the VC has on the firm’s board: BOARD VOTING RIGHTS. VC VOTING MAJORITY and BOARD MAJORITY are dummy variables that take value one if the VC has a majority in either the firm’s shareholder meeting or on the firm’s board. Finally, we measure the degree of supermajority provisions by looking at the REQUIRED DECISION MAJORITY and the BOARD REQUIRED MAJORITY. Our previous measures for the VCs majorities take these into account.
Of course, we observe the types of control rights used in the firm: VETO RIGHTS is the sum of the following veto rights: OPERATIONAL VETO RIGHTS, STRUCTURAL VETO RIGHTS,
32In Germany, this means doctoral degrees, a Habilitation, a Privatdozent or a professorship.
33We also include the business angels in our sample in this category.
VETO ASSET SALES, and the two veto rights against profit distribution, both for the board and for shareholders. OPERATIONAL VETO RIGHTS is the sum of the veto rights that govern the entrepreneur’s actions in the firm: a veto against changes in the firm’s line of business, a veto right against certain financial decisions such as capital expenditures or the use of derivative instruments, a veto right against changes in the firm’s head count and veto’s against other decisions, i.e. against lawsuits on behalf of the firm. STRUCTURAL VETO RIGHTS is the sum of the veto rights that secure the VC’s position in the firm: A veto right against changes in the shareholders’ agreement, a veto that forbids the firm’s dissolution and a veto against changes in the firm’s capital structure such as giving out new shares. Often the shareholders have a veto right against the use of the firm’s profit.
LIQUIDATION RIGHTS is the sum of a debt dummy and the STAGING dummy. We also create two dummies that take value one when a VC (or an independent VC) has any liquidation right. The PUT OPTION dummy takes value one when then VC has the right to put his shares to the entrepreneur after a specific period of time, that is when he is able to force a buy-back by the entrepreneur. The DRAG ALONG tells us whether the VC has the right to force the entrepreneur to sell his stake to an (outside) bidder while the TAKE ALONG dummy tells us whether the VC has the right to demand from the entrepreneur to include his stake in any sale of the entrepreneur’s stake. We code all this variables to take value if these rights are presents.
Sometimes qualifying conditions are present. However, for sake of simplicity, we do not consider these elements here.
The EXIT RIGHTS dummy is the sum of the sale rights found in the sample, that is the sum of the dummy for the existence for an anti-dilution protection, the VC’s preemption right dummy, the drag and take (tag) along dummies and finally the info duty dummy. The preemption right allows the VC to buy the entrepreneur’s stake in the firm if the entrepreneur were to sell his stake for the price paid by the potential buyer, while the info duty dummy forces the entrepreneur to inform the VC about potential buyers of the firm that approach the entrepreneur. We also code the presence of IPO rights: Piggy back rights allow the VC to include his shares in any offering of the founder’s shares in a public market, while the priority registration right allows the VC to register his shares with priority to those of the entrepreneur in case not all can be listed at once.
We also know whether the VC has a LIQUIDATION PREFERENCE (that is if his claims are senior to those of the entrepreneur, even if both hold equity). We also have a dummy variable called RIGHT TO REPLACE ENTREPRENEUR that takes value one exactly when the VC has this right. ANTI-COMPETITION CLAUSE takes value one if the VC has the right to ban the
entrepreneur to work in a related industry if he leaves the firm. Finally FOUNDER VESTING takes value one if the entrepreneur is not allowed to keep all his equity in firm if he resigns from his position in the firm. We do not discern whether there is a difference between the VC firing the entrepreneur or the entrepreneur leaving on his own.
Other Variables
Finally, we observe several other variables. TIME TO EXIT denotes the time the VC thinks he needs to exit the venture34. The DUMMY TRADE SALE EXPECTED indicates whether the VC thinks that a trade sale is expected by the VC. This expectation is often stated by the VC in his investment memorandum. The fact that this is stated in the investment memorandum means that the VC expects this prior to him signing the contract with the entrepreneur, but that the entrepreneur is not necessarily aware of this. Therefore, causality should run from the expectation of the possibility of a TS to the inclusion of the term in the contract.
34We often had no information about this variable, as we took it directly from the VC’s investment memorandi.
For the programmes covered, KfW’s maximum investment horizon was ten years. Thus, we set this variable to 10 when we faced an investment with debt only and no information about the expected contract duration.
We ran robustness checks and found no differences in our results.
7 Appendix
Table 1: Sample selection
-1997 1998 - 2000 2000 - 2004 Total
1 51 102 22 175
10 0 12 4 16
11 0 8 1 9
100 4 16 2 22
1000 1 33 32 66
1001 0 6 3 9
1010 0 1 1 2
1011 0 1 0 1
Total 56 179 65 300
Notes:Summary statistics for 464 investment rounds into 290 entrepreneurial firms by venture capital funds. In this table, the structure of the underlying sample with respect to program choice and the respective period of time are presented.
1 = Technology Participation Programme (KfW/BMWA + KfW/BMTF - Technologie-Beteiligungsprogramm); 10 = ERP-Innovation Programme (ERP-Innovationsprogramm (Beteiligungsvariante)); 100 = Guarantee Programme (KfW-Risikokapitalprogramm - Garantien); 1000 = Fund Programme (KFW-(KfW-Risikokapitalprogramm - Fondsfinanzierung); and mixes.
Table 2: Summary Statistics
Notes: Summary statistics for 464 investment rounds into 290 entrepreneurial firms by venture capital funds. The statistics given are the averages per round, not per firm. For staging and staging modes first column refers to the number of observations and the second to the percentage.
Table3:Variableanddatadescription VariableVariabledescription Firmcharacteristic AGEAgeofthefirmattheclosingofthefinancinground FINISHEDPRODUCTFirmhasaproductwhichcanbesold INDUSTRYDUMMIESIndicatetheindustryinwhichtheportfoliofirmoperates GROWTHINDUSTRIESEitherBIOTECH,IT/Telecomsortraditionalhigh-tech EARLYSTAGESeedorstart-upfirm REVENUESFirmhaspositiverevenues BALANCESHEETDummyforauditedbalancesheet FARRatiooffixedassetstobalancesheettotal ROUNDIndicatingthenumberoffinancingroundsthroughwhichthefirmhasalreadygone REPEATENTREPRENEURFounderhasalreadyrunafirm SCIENCEBACKGROUNDFounderwithengineeringbackground RESEARCHDEGREEFounderhasatleastaPhD InvestmentConditions INDEPENDENT,PUBLICVCVCbeinganindependentorpublicVC OTHERVCBank-dependentandcorporateVC STAGINGDummyindicatingwhethertheprojectisfinancedinseveralsteps PERIOD1,2,3Financinghastakenplacebefore1998,between1998and2000;after2000 VotingandControlRights VCMAJORITYDummyindicatingVCmajorityintheshareholdersmeeting BOARDMAJORITYDummyindicatingVCmajorityinthefirm’sboard VETORIGHTSSumofallvetorightsdummies OPERATIONALVETORIGHTSSumofdummiesindicatingvetorightsagainstchangesinfirm’sbusinessplan, againstcertainfinancialdecisions,againstchangesinthefirm’sheadcount andagainstotherdecisions STRUCTURALVETORIGHTSSumofthevetorightsthatprotectthestrategicpositionoftheVCinthefirm LIQUIDATIONRIGHTSCountsthenumberofliquidationrightsavailabletotheVC. LIQUIDATIONPREFERENCEVC’sclaimisseniortotheentrepreneur’sclaim ANTI-DILUTIONPROTECTIONGivestheVCtherighttoblockadilutionofhisequitystakeinthefirm ANTI-COMPETITIONCLAUSEClausewhichhinderstheentrepreneurtoengageinrelatedorcompetingactivities PRIORITYREGISTRATIONVChasseniorrightstolisthissharesinthecaseofanIPO FOUNDERVESTINGDummyindicatingthattheentrepreneurisnotallowedtokeephis(entire) equitypositioninthecaseofresignation OtherVariables TIMETOEXITMeasurestheexpectedtimetoexitasestimatedbytheVCsintheinvestmentmemorandi TRADESALEEXPECTEDIndicateswhethertheVCexpectsatradesaletohappen
Table 4: Summary statistics II: security choice
Category Equity Debt & Equity Convertibles Debt
Description Pure Equity Debt> Debt< US Style Convertible Mixes Nonstandard Pure
Equity + LP Equity Equity US Style Equity Debt Debt
Category 1 2 3 5 6 7 8 4 9
Notes: In this table, we report the VC’s security choice of 91 German funds for 464 investment rounds into 290 en-trepreneurial firms. We categorize each security according to five characteristics: upside cash-flow rights, downside pro-tection, changes of control in defaults, sash-flow rights when the firm is sold and voting rights. We have ten missing values.
Table 5: Summary statistics III: dynamic security choice
Category Equity Debt & Equity Convertibles Debt
Description Pure Equity Debt> Debt< US Style Convertible Mixes Nonstandard Pure
Equity + LP Equity Equity US Style Equity Debt Debt
Category 1 2 3 5 6 7 8 4 9 Total
Period 1 # 7 1 25 1 0 0 1 5 26 67
% 10.45 1.49 37.31 1.49 0.00 0.00 1.49 7.46 38.81 100.00
2 # 31 37 102 12 4 2 11 2 52 257
% 12.06 14.40 39.69 4.67 1.56 0.78 4.28 0.78 20.23 100.00
3 # 13 47 30 7 7 8 4 4 18 140
% 9.29 33.57 21.43 5.00 5.00 5.71 2.86 2.86 12.86 100.00
Total # 51 85 157 20 11 10 16 11 96 464
% 10.99 18.32 33.84 4.31 2.37 2.16 3.45 2.37 20.69 100.00
Notes: In this table, we report the security choice of 91 German venture capital funds for 464 investment rounds into 290 entrepreneurial firms over three different time periods. Period 1 are the years 1990-1997, period 2 are the years 1998-2000 and period 3 are the years 2001-2004. We categorize each security according to five characteristics: upside cash-flow rights, downside protection, changes of control in defaults, sash-flow rights when the firm is sold and voting rights. We have ten missing values.
Table6:DescriptiveVariables:Rounds FullSample1stRoundsonly2ndRoundsonly3rdRoundsandmore CategoryVariableObsMeanStd.Dev.ObsMeanStd.Dev.ObsMeanStd.DevObsMeanStd.Dev VetoRightsVetoShareholder’sAgreement417.9784173.1454912253.972332+++.1643448111.981982.13361975310 VetoAssetSales352.8096591.3931289215.827907+.378342294.787234.411457943.7674419.4274626 VetoCapitalStructure415.8578313.3496446251.8326693.3740166111.8918919.311925153.9056604.2950978 VetoBusinessPlan339.519174.5003708211.521327+.500732991◦◦◦.5824176.495892837.3513514.4839775 VetoOthers334.6706587.4706792201.6865672.465046989.6516854.479135744.6363636.4866071 VetoFinancialDecisions346.690751.4628531210.7+.459352693◦.7311828.445747743.5581395.5024855 VetoHeadCount339.5988201.4908618209.5837321.494122691.6483516.480130239.5641026.5023561 VetoCompanyDissolution418.9282297.2584165253.9288538.2575785112.9285714.258696953.9245283.2666788 BoardVetoProfitDistribution250.892.311003138.8623188+++.345820377.9090909.289364935.9714286.1690309 ShareholdersVetoProfitDistribution351.6752137.4689635210***.6+++.491068695.7578947.430630246.8478261.3631584 VotingRightsRequiredDecisionMajority35552.671388.1392220952.405127.74252310052.78678.3201834653.630439.511067 VCVotingMajority449.2004454.4007802278**.1258993+++.3323341117◦◦◦.2222222.417527854.537037.5033084 VotingRights/Cash-FlowRights44934.1372222.74323278***28.87+++21.2813117◦◦◦38.8836821.638445450.9903722.26202 BoardVotingRights17942.1683821.572549437.48255+++19.2678553◦◦42.8011320.837963254.88524.40976 BoardVCcontrol177.3220339.468581492.2173913+++.414731153◦◦◦.3207547.471233432.625.4918694 Boardrequiredmajority21150.949624.12435811351.478145.1406756050.277832.1520883850.438682.704231 Boardexists?457.4617068.4990778286**.3951049+++.4897301117◦◦.5128205.501985454.7037037.4609109 TerminationRightsVChasterminationrights454.8612335.3460841283*.8798587+.3257027117.8205128.385410354.8518519.3585825 IndVChasterminationrights347.9308357.2540997223*.9506726.217037884.8809524.325789640.925.2667468 Staging456.7280702.4454426283.7137809+.4527937118.7288136.446467955.8.4036867 Debt464.2306034.4216737290***.2068966+++.4057809119.2773109.449564255.2545455.4396203 PutOption396.1641414.3708724246.1504065.3581982103.1941748.397498447.1702128.3798826 SaleRightsAntiDilutionProtection403.3151365.4651477247***.2348178+++.4247456104◦◦.3846154.488860252.5576923.501506 VCpreemption405.6617284.4737067251***.5697211+++.4961043104◦◦.7692308.423365450.9.3030458 Epreemption405.3234568.468374251.2868526+.4531958104.3653846.483869850.42.4985694 DragAlong413.3874092.4877493255**.3058824+++.4616863107◦◦◦.4392523.498631551.6862745.4686233 TakeAlong412.4975728.500602254***.4015748+++.4911846107◦◦◦.5794393.495972151.8039216.4009792 InfoDuty403.2009926.4012406251**.1434263+++.3512074105.2571429.43915547.3829787.4913686 IPORightsPiggyback383.0287206.1672387230.0173913.1310094103.038835.194146250.06.2398979 PriorityRegistration337.0267062.1614632204.0196078.138989591.043956.206133142.0238095.1543033 OthersLiquidationpreference414.3888889.4880879253*.3280632+++.4704386108◦◦.4259259.496787953.6037736.4937931 RighttoReplaceEntrepreneur417.1822542.3865176254**.1220472+++.3279866109◦◦◦.2201835.416284254.3888889.4920756 FounderVesting412.1213592.3269413251.1115538.3154457108.1111111.315734853.1886792.3949977 Anti-competitionclauses419.7613365.6673049258.7054264++.4567369107.85981311.07675854.8333333.3761774 Notes:Summarystatisticsfor464investmentroundsinto290entrepreneurialfirmsby91Germanventurecapitalfunds.Thefirstsectionstatestheresultsforthe completesample,theotherthreeareforallobservationsinthefirst,secondandthirdorhigherroundsrespectively.***,**,*denotesstatisticalsignificanceat the1%,5%,and10%levelrespectivelyforthedifferencebetweenthefirstandsecondround.+++ ,++ ,+ istheequivalentforthedifferencebetweenthefirstand thirdround,while◦◦◦ ,◦◦ ,◦ denotesstatisticalsignificancebetweenthesecondandthirdround.
Table7:DescriptiveVariables:Periods FullSample1stPeriod2ndPeriod3rdPeriod egoryVariableObsMeanStd.Dev.ObsMeanStd.Dev.ObsMeanStd.DevObsMeanStd.Dev. etoRightsVetoShareholder’sAgreement417.9784173.145491259.9491525+++.2215719225◦◦.9733333.161466513010 VetoAssetSales352.8096591.393128954.8703704.3390495193.8031088.3986836103.7961165.4048535 VetoCapitalStructure415.8578313.349644658**.7068966+++.459161224◦◦.8616071.3460852130.9230769.2675002 VetoBusinessPlan339.519174.500370856.4642857.5032363190.5315789.500320191.5384615.5012804 VetoOthers334.6706587.470679249.6122449.4922875186.6505376.478087198.7346939.443766 VetoFinancialDecisions346.690751.462853156.625+.4885042191◦.6701571.471391599.7676768.4244632 VetoHeadCount339.5988201.490861854.5+.5046949188.6010638.490987195.6631579.4751377 VetoCompanyDissolution418.9282297.258416561.852459++.3575875224◦◦.9196429.2724541130.9769231.1507287 BoardVetoProfitDistribution250.892.31100331.8709677.3407771126◦◦◦.8492063.359276292.9673913.1785834 ShareholdersVetoProfitDistribution351.6752137.468963555.5090909+++.504525186◦◦◦.6236559.4857756108.8611111.3474428 otingRightsRequiredDecisionMajority35552.671388.1392249*55.15653+10.4093220252.32517.64994710452.173087.717641 VCVotingMajority449.2004454.400780263***.031746+++.1767314250◦◦◦.124.3302427136.4191176.4952388 VotingRights/Cash-FlowRights44934.1372222.7432363***18.52714+++18.81325250◦◦◦31.6199619.4385413645.9956824.28823 BoardVotingRights17942.1683821.572541132.05909++6.5330489◦◦◦33.8601117.398867853.1915422.48837 BoardVCcontrol177.3220339.468581411***0+++087◦◦◦.1724138.379929578.5384615.5017452 Boardrequiredmajority21150.949624.12435814***500108◦51.237784.819578850.757843.492216 Boardexists?457.4617068.499077867***.2089552+++.4096308250◦◦◦.432.4963481137.6423358.4810715 erminationRightsVChasterminationrights454.8612335.346084165*.8923077+.3124038251.8326693.3740166136.8970588.3050054 IndVChasterminationrights347.9308357.254099734***1+++0198.9242424.2652806114.9210526.2708471 Staging456.7280702.445442664.75.4364358251◦◦◦.6812749.4669132138.8043478.3981471 Debt464.2306034.421673767***.4626866+++.5023689255◦◦◦.2078431.4065619139.1582734.3663172 PutOption396.1641414.370872460***.1666667.375823211.1611374.368532123.1707317.3778133 RightsAntiDilutionProtection403.3151365.465147757***.0175439+++.1324532215◦◦◦.227907.4204612129.5891473.4939067 VCpreemption405.6617284.473706760***.4+++.4940322215◦◦◦.6325581.4832333128.8359375.3717874 Epreemption405.3234568.46837460.2166667+++.4154502215◦.3023256.4603373128.40625.4930621 DragAlong413.3874092.487749361***.0819672+++.2765913223◦◦◦.3318386.4719327127.6299213.4847377 TakeAlong412.4975728.50060261***.2131148+++.4129065221◦◦◦.4479638.4984138128.7265625.4474749 InfoDuty403.2009926.401240660.0833333+++.2787178218◦◦◦.146789.3547099123.3577236.4812906 RightsPiggyback383.0287206.1672387510+++0208◦◦.0144231.1195145123.0650407.2476062 PriorityRegistration337.0267062.1614632520+++0183◦◦.010929.1042541101.0693069.2552421 hersLiquidationpreference414.3888889.488087958***.0517241+++.2234038222◦◦◦.3153153.4656914132.6590909.4758206 RighttoReplaceEntrepreneur417.1822542.386517657***.0350877+++.1856372226◦◦◦.1327434.3400503131.3282443.4713768 FounderVesting412.1213592.326941355***0+++0224◦◦◦.0714286.2581162130.2615385.4411726 Anti-competitionclauses419.7613365.667304958***.5+++.5043669227◦◦.7312775.4442749132.9393939.9471337 Notes:Summarystatisticsfor464investmentroundsinto290entrepreneurialfirmsby91Germanventurecapitalfunds.Thefirstsectionstatestheresultsforthe completesample,theotherthreeareforallobservationsbefore1998(Period1),between1998and2000(Period2)andafter2000(Period3)respectively.***,**, *denotesstatisticalsignificanceatthe1%,5%,and10%levelrespectivelyforthedifferencebetweenthefirstandsecondperiod.+++ ,++ ,+ istheequivalentfor thedifferencebetweenthefirstandthirdperiod,while◦◦◦ ,◦◦ ,◦ denotesstatisticalsignificancebetweenthesecondandthirdperiod.
Table8:DescriptiveVariables:ExpectedContractDuration FullSample1-3years4-6years7-10years CategoryVariableObsMeanStd.Dev.ObsMeanStd.Dev.ObsMeanStd.Dev.ObsMeanStd.Dev. VetoRightsVetoShareholder’sAgreement417.9784173.14549121081+++059◦◦◦1098.9183673.275212 VetoAssetSales352.8096591.393128993.7419355.439941352.8076923.397958690.8.4022409 VetoCapitalStructure415.8578313.3496446108.9814815+++.135445459◦◦◦.9830508.130188997.5463918.5004294 VetoBusinessPlan339.519174.500370881.5679012.498454451.5882353.497050193.4516129.5003505 VetoOthers334.6706587.470679287.6896552.465316753.754717.434372285.7058824.4583492 VetoFinancialDecisions346.690751.462853189*.6629213.475390352◦◦.8076923.397958692.6195652.488154 VetoHeadCount339.5988201.490861883.6746988+++.471335354◦◦◦.6851852.468803191.3956044.4916892 VetoCompanyDissolution418.9282297.2584165108*.9537037++.211105661◦◦◦1098.8469388.3618977 BoardVetoProfitDistribution250.892.31100375.88.327149943◦◦.9302326.257769659.9322034.2535545 ShareholdersVetoProfitDistribution351.6752137.468963590.7666667.425322155.8.403686791.6043956.4916892 VotingRightsRequiredDecisionMajority35552.671388.139229251.78261++6.85297149◦◦51.653066.0675067254.583339.984142 VCVotingMajority449.2004454.4007802115.3391304+++.47548660◦◦◦.3166667.4691018108.0092593.096225 VotingRights/Cash-FlowRights44934.1372222.7432311544.30784+++19.7576960◦◦◦43.41316.9089410811.9948116.57282 BoardVotingRights17942.1683821.572546748.19433+++21.6478831◦◦◦43.215.296281424.6428620.93762 BoardVCcontrol177.3220339.468581467.4328358+++.499207931◦.2903226.461414412.0833333.2886751 Boardrequiredmajority21150.949624.12435852*49.0323110.640472452.430836.721034953.741117.423995 Boardexists?457.4617068.4990778117*.6923077+++.463523662◦◦◦.5645161.4998678110.1363636.3447449 TerminationRightsVChasterminationrights454.8612335.3460841118***1.101695.604680260◦◦1.383333.55515051121.142857.868437 IndVChasterminationrights347.9308357.2540997108*.8888889+++.315734856.9642857.18725631910 Staging456.7280702.4454426115.7913043+++.408154962◦◦◦.8225806.3851418110.5636364.4982036 Debt464.2306034.4216737119*.3109244+++.464829162◦◦◦.5806452.4974818112.9732143.1621823 PutOption396.1641414.3708724100.19.394277255.2363636.4287638102.1568627.3654672 SaleRightsAntiDilutionProtection403.3151365.4651477103.5533981+++.499571555.4363636.500504899.0707071.2576394 VCpreemption405.6617284.4737067105.8666667+++.34156557◦◦◦.7894737.4113064100.34.4760952 Epreemption405.3234568.468374105**.4666667+++.501280457.2982456.4615545100.22.4163332 DragAlong413.3874092.4877493103*.6407767+++.482118958◦◦◦.4827586.5040669104.0673077.2517675 TakeAlong412.4975728.500602103.6893204+++.465034857◦◦◦.6315789.4866643104.2211538.4170337 InfoDuty403.2009926.4012406106.3113208+++.465233354◦◦◦.2592593.442343102.0490196.2169752 IPORightsPiggyback383.0287206.1672387101*.0792079+++.2714154.0185185.13608288500 PriorityRegistration337.0267062.161463284***.0952381+++.295306646008400 OthersLiquidationpreference414.3888889.4880879107.6448598+++.480807858◦◦◦.5517241.5016609102.0196078.1393331 RighttoReplaceEntrepreneur417.1822542.3865176108.4351852+++.498092656◦◦◦.375.4885042101.029703.1706133 FounderVesting412.1213592.3269413103.184466+++.389760455◦.1818182.3892495101.019802.1400141 Anti-competitionclauses419.7613365.6673049105.8666667+++.34156555.94545451.445532104.5192308.5020496 Notes:Summarystatisticsfor464investmentroundsinto290entrepreneurialfirmsby91Germanventurecapitalfunds.Thefirstsectionstatestheresultsforthe completesample,theotherthreeareforallobservationsinthesample.Thesecondpartsummarizesthedistributionofvetorightsforexpectedcontractdurations between1to3years,thethirdpartfordurationsbetween3to6yearsandthefourthfordurationsbetween6to10years.***,**,*denotesstatisticalsignificance atthe1%,5%,and10%levelrespectivelyforthedifferencebetweenthetheshortestandmiddledurations.+++,++,+istheequivalentforthedifferencebetween theshortestandlongestdurations,while◦◦◦ ,◦◦ ,◦ denotesstatisticalsignificancebetweenthemiddleandthelongestdurations.
Table9:SeparationofCashFlowsandControl: VC’sEquityStake 0%<25%<50%<75%≥75%NoofObs VetoRightsObs.MeanObs.MeanObs.MeanObs.MeanObs.Mean Shareholder’sAgreement∗54.851851950.982201681221414 AssetSales54.759259355.9272727167.778443157.824561412.8333333345 CapitalStructure∗54.240740750.642201681221414 BusinessChanges54.444444454.4444444168.583333348.41666678.625332 OtherRights51.62745148.625160.6687556.660714313.9230769328 FinancialDecisions54.53703753.6851852163.754601255.636363613.7692308332 HeadCount54.370370453.5849057163.699386553.60377369.4444444332 FirmDissolution∗54.796296350.622201681221414 ShareholdersVetoProfitDistribution∗,∗∗54.46296353.4716981156.653846265.9846154161344 ManagementReplacement64060.0333333200.0867.567164221.9047619412 VC’sSupervisoryBoardStake 0%<25%<50%<75%≥75%NoofObs VetoRightsObs.MeanObs.MeanObs.MeanObs.MeanObs.Mean Shareholder’sAgreement∗7.8571429151108136171173 AssetSales8.7514.714285781.839506231.64516136.8333333140 CapitalStructure∗7.428571415.8108.944444436171173 BusinessChanges8.2514.214285775.5628.39285715.8130 OtherRights7.571428614.785714380.787532.5937561139 FinancialDecisions7.714285714.577.688311732.718756.333333134 HeadCount7.714285714.571428677.584415630.76666676.8333333134 FirmDissolution∗7.714285715.7333333108.96296336171173 ShareholdersVetoProfitDistribution∗,∗∗7013.692307780.77528.892857171135 ManagementReplacement10016.25104.346153837.891891971174 Notes:Thistablebreaksdownvetorightsbythedistributionofvotingrightsinthefirm.∗ denotesvetorightsthataregranted toanyshareholderwithafractionofmorethan25%ofthefirmsequity.∗∗ denotesthatthistopicistobedecidedbythe supervisoryboardortheshareholder’smeeting.NotethattheSupervisoryBoardisallowedtoreplacethefirm’smanagement, thusaVCmajoritythereeffectivelygrantstheVCthisright.
Table10:IndependentVariablescorrelationsPartI (1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12) FinishedProduct(1)1.0000 Age(2)0.20181.0000 0.0000 Round(3)0.08070.00591.0000 0.08910.9025 FAR(4)0.10770.14880.08701.0000 0.03260.00310.0784 BalanceSheetSize(5)-0.04360.0191-0.0423-0.01031.0000 0.43020.72940.43250.8499 NormalizedBalanceSheet(6)0.04600.1305-0.03470.00920.10381.0000 0.40800.01870.52360.86780.0558 ResearchDegree(7)-0.23380.09620.08710.04700.0668-0.05281.0000 0.00000.06430.08530.38440.26040.3773 ScienceBackground(8)-0.01270.0557-0.07040.08020.01520.01970.13481.0000 0.80200.27540.15760.13110.79480.73870.0078 RepeatEntrepreneur(9)0.05220.1563-0.0172-0.0113-0.02850.0862-0.22990.03671.0000 0.30860.00240.73330.83320.62970.14730.00000.4904 AuditedBalanceSheet(10)0.49160.23950.09130.2732-0.08300.0366-0.14770.04370.05501.0000 0.00000.00000.07100.00000.15990.53850.00700.41880.3144 Periode02*EarlyStage(12)-0.21510.2031-0.1593-0.1658-0.0596-0.0499-0.0019-0.0484-0.0438-0.26961.0000 0.00000.00000.00100.00120.29290.38290.97110.35170.40640.0000 VCExpert*EarlyStage(13)-0.26380.2593-0.0178-0.1700-0.0862-0.07070.21110.0352-0.0590-0.30030.35711.0000 0.00000.00000.71420.00090.12800.21620.00010.49820.26350.00000.0000 VCMajority(14)-0.01250.00200.33530.0475-0.0190-0.02820.19120.0217-0.0146-0.0402-0.11960.0884 0.79510.96690.00000.34560.73050.61160.00020.66670.77490.43230.01490.0723 TradeSaleExpected(15)0.12570.06460.04560.0217-0.0320-0.0373-0.0582-0.13600.08600.0715-0.15470.0122 0.01320.21020.36380.68490.58610.52850.28070.01090.11240.18470.00270.8141 IndependentVC(16)-0.05140.13460.1078-0.11490.05140.04350.0812-0.1132-0.0120-0.11400.11850.1830 0.28020.00480.02050.02030.34140.42520.10940.02310.81290.02410.01460.0002 PublicVC(17)0.02170.0492-0.1795-0.0334-0.0336-0.0318-0.09990.08240.06660.0044-0.0486-0.1400 0.64810.30430.00010.50070.53400.56010.04870.09850.18740.93160.31810.0039 Period1(18)-0.02400.0342-0.17130.0191-0.0346-0.02740.00740.1229-0.10230.0967-0.3204-0.0169 0.61430.47480.00020.69970.52120.61430.88370.01350.04230.05580.00000.7281 Period3(19)0.09270.01510.33450.0448-0.0200-0.03600.0927-0.00930.11820.0745-0.53180.0528 0.05060.75220.00000.36600.71070.50820.06720.85280.01900.14110.00000.2769 ResearchIndustries(20)-0.17600.24290.0983-0.14710.03620.04370.0947-0.0309-0.0505-0.18110.12230.3859 0.00020.00000.03430.00280.50210.42180.06150.53610.31700.00030.01150.0000 LifeScience(21)-0.23670.07080.08360.00260.0991-0.02390.43960.1635-0.1743-0.0700-0.03560.1620 0.00000.13840.07210.95780.06550.66110.00000.00100.00050.16660.46410.0008 Internet(22)0.06500.09520.0058-0.1410-0.0242-0.0196-0.1439-0.4296-0.0367-0.19040.22530.1853 0.17140.04600.90160.00420.65360.71900.00440.00000.46740.00010.00000.0001 IT(23)0.02120.10900.0198-0.0587-0.03410.0763-0.18840.10100.10770.0189-0.00130.0909 0.65620.02220.67120.23560.52710.16040.00020.04260.03270.70900.97920.0607 Trad.High-Tech(24)0.07460.1509-0.04060.1204-0.0229-0.0321-0.01030.1231-0.04880.0679-0.1008-0.0275 0.11600.00150.38270.01480.67160.55490.83910.01330.33430.17980.03760.5720 TimetoExit(25)0.00710.1319-0.25200.1032-0.0953-0.0467-0.05340.1406-0.0112-0.0238-0.0543-0.1454 0.91420.04960.00010.14000.21120.54320.43910.03950.87590.73790.41730.0292 :Pairwisecorrelationsfortheindependentvariablesusedintheregressionsfor464investmentroundsinto290entrepreneurialfirmsby91Germanventurecapitalfunds.Thesecondrowforeachvariabledenotes levelofstatisticalsignificance.FINISHEDPRODUCTindicateswhetherthefirmhasaproductthatcanbesold.ThevariableROUNDindicatestheroundtheinvestmentisin.TheBALANCESHEETSIZEvariable esthesizeofthebalancesheettotalwherebyweusebalancesheetdataoftheyearprecedingtheyearoftheclosingofthecorrespondingfinancing.ThedummyAUDITEDBALANCESHEETtakesvalueoneifthe balancesheetisauditedornot.Wecreatetwointeractionvariables:VCEXPERT*EARLYSTAGEtakesvalueonewhentheVCinvestsinanindustryhestatestohaveexperiencein,whereastheEARLYSTAGE ytakesvalueoneforseedandstart-upfirms.Wealsocreateaninteractiontermbetweenfirmsfinancedinthesecondperiod(1998-2000)andtheEARLYSTAGEdummy.Wealsoknowwhetheranyofthefounders abackgroundinengineering,whichwecodeasSCIENCEBACKGROUND.IfanyofthefoundershasaPhDoradegreeabove,wecodethevariableRESEARCHDEGREEtotakevalueone.ThevariableREPEAT TREPRENEURcaptureswhetherwefacearepeatentrepreneur.TheDUMMYVCMAJORITYindicateswhethertheVChasthemajorityofvotingrightsinthefirm.TheDUMMYTRADESALEEXPECTED cateswhethertheVCthinksthatatradesaleisexpectedbytheVC.WeclassifyeachVCaccordingtohistypeintothreecategoriesnamedINDEPENDENTVC,PUBLICVCandOTHERVCs.Thelattercategory bothbank(-dependent)andcorporateVCs.Also,weobservetheyearwhenthefinancingroundisclosedanddefinethreetimedummies.PERIOD1takesvalueoneifthefinancingroundwasclosedduringthe lyperiodofrelativelylowventurecapitalactivity,namelyfrom1990until1997,PERIOD2ifitwasclosedduringtheboom,i.e.between1998and2000andPERIOD3ifitwasclosedafter2000-aperiodofrelative andreorganizationoftheventurecapitalindustry.Moreover,weobservethefirm’sindustry:LIFE-SCIENCE,INTERNET,IT/TELECOM,TRADITIONALHIGH-TECHINDUSTRIESandOTHERINDUSTRIES alldummyvariablesthatindicatetheproject’sindustry.ThedummyGROWTHINDUSTRIESisadummyvariablethatindicateswhetherthefirm’sindustryisresearchintensive,thatiswhetheritisaBiotech, elecomsoraTraditionalHigh-Techfirm.TIMETOEXITmeasurestheexpectedtimetoexit,asestimatedbytheVCsintheirinvestmentmemorandi.
Table11:IndependentVariablescorrelationsPartII (13)(14)(15)(16)(17)(18)(19)(20)(21)(22)(23)(24) FinishedProduct(1) Age(2) Round(3) FAR(4) BalanceSheetSize(5) NormalizedBalanceSheet(6) ResearchDegree(7) ScienceBackground(8) RepeatEntrepreneur(9) AuditedBalanceSheet(10) FAR(11) Periode02*EarlyStage(12) VCExpert*EarlyStage(13) VCMajority(14)1.0000 TradeSaleExpected(15)0.09001.0000 0.0770 IndependentVC(16)0.22840.17051.0000 0.00000.0006 PublicVC(17)-0.2574-0.2145-0.65841.0000 0.00000.00000.0000 Period1(18)-0.1702-0.1490-0.20650.14721.0000 0.00030.00280.00000.0015 Period3(19)0.36010.27520.1030-0.0772-0.27001.0000 0.00000.00000.02680.09760.0000 ResearchIndustries(20)0.11870.03190.2296-0.1617-0.15560.06901.0000 0.01180.52580.00000.00050.00080.1378 LifeScience(21)0.2855-0.06730.1183-0.12220.04750.06990.32391.0000 0.00000.17980.01090.00860.30730.13250.0000 Internet(22)-0.07450.09000.1647-0.1142-0.1346-0.02500.2366-0.16741.0000 0.11510.07260.00040.01400.00370.59070.00000.0003 IT(23)-0.07500.04090.0647-0.0267-0.11640.04510.5225-0.3830-0.24571.0000 0.11260.41500.16510.56680.01210.33220.00000.00000.0000 Trad.High-Tech(24)-0.0741-0.0007-0.21420.12910.1214-0.0527-0.6498-0.2523-0.1619-0.37041.0000 0.11710.98960.00000.00550.00890.25720.00000.00000.00050.0000 TimetoExit(25)-0.2507-0.2703-0.59090.64570.3706-0.1886-0.2963-0.1119-0.1810-0.07000.11071.0000 0.00010.00000.00000.00000.00000.00350.00000.08500.00510.28230.0884 :Pairwisecorrelationsfortheindependentvariablesusedintheregressionsfor464investmentroundsinto290entrepreneurialfirmsby91Germanventurecapitalfunds.Thesecondrowforeachvariabledenotes levelofstatisticalsignificance.FINISHEDPRODUCTindicateswhetherthefirmhasaproductthatcanbesold.ThevariableROUNDindicatestheroundtheinvestmentisin.entrepreneur.TheBALANCESHEET variablemeasuresthesizeofthebalancesheettotalwherebyweusebalancesheetdataoftheyearprecedingtheyearoftheclosingofthecorrespondingfinancing.ThedummyAUDITEDBALANCESHEETtakes eoneifthefirm’sbalancesheetisauditedornot.Wecreatetwointeractionvariables:VCEXPERT*EARLYSTAGEtakesvalueonewhentheVCinvestsinanindustryhestatestohaveexperiencein,whereasthe RLYSTAGEdummytakesvalueoneforseedandstart-upfirms.Wealsocreateaninteractiontermbetweenfirmsfinancedinthesecondperiod(1998-2000)andtheEARLYSTAGEdummy.Wealsoknowwhether ofthefoundershasabackgroundinengineering,whichwecodeasSCIENCEBACKGROUND.IfanyofthefoundershasaPhDoradegreeabove,wecodethevariableRESEARCHDEGREEtotakevalueone.The REPEATENTREPRENEURcaptureswhetherwefacearepeatentrepreneur.TheDUMMYVCMAJORITYindicateswhethertheVChasthemajorityofvotingrightsinthefirm.TheDUMMYTRADESALE PECTEDindicateswhethertheVCthinksthatatradesaleisexpectedbytheVC.WeclassifyeachVCaccordingtohistypeintothreecategoriesnamedINDEPENDENTVC,PUBLICVCandOTHERVCs.The ercategoryincludesbothbank(-dependent)andcorporateVCs.Also,weobservetheyearwhenthefinancingroundisclosedanddefinethreetimedummies.PERIOD1takesvalueoneifthefinancingroundwasclosed theearlyperiodofrelativelylowventurecapitalactivity,namelyfrom1990until1997,PERIOD2ifitwasclosedduringtheboom,i.e.between1998and2000andPERIOD3ifitwasclosedafter2000-aperiod relativedeclineandreorganizationoftheventurecapitalindustry.Moreover,weobservethefirm’sindustry:LIFE-SCIENCE,INTERNET,IT/TELECOM,TRADITIONALHIGH-TECHINDUSTRIESandOTHER USTRIESarealldummyvariablesthatindicatetheproject’sindustry.ThedummyGROWTHINDUSTRIESisadummyvariablethatindicateswhetherthefirm’sindustryisresearchintensive,thatiswhetheritisa h,IT/TelecomsoraTraditionalHigh-Techfirm.TIMETOEXITmeasurestheexpectedtimetoexit,asestimatedbytheVCsintheirinvestmentmemorandi.
Table12:Theuseofvetorights AllVetoRightsStructuralVetoRightsOperationalVetoRights BaseModelModel2Model3Model4Model5Model6 βzβzβzβzβzβz FinishedProduct.07755620.51.33454131.57.15075220.75.39716481.57.05259810.35.04019440.19 Round-.1039884-1.52-.181757-2.16-.0526071-0.51-.1055406-1.04-.1554284-1.83-.1722674-1.76 FAR.34544761.06-.1923447-0.57.07288130.27 RepeatEntrepreneur-.1008219-0.46.46184132.09-.488756-2.25 AuditedBalanceSheet-.658061-2.51-.4209744-1.45-.3297214-1.40 VCExpert*EarlyStage.0305260.11.04104570.11-.1656581-0.63 Periode02*EarlyStage-.613905-1.98-.4701807-1.38-.4385698-1.39 IndependentVC.44188922.15.59997972.56.13141950.47-.2910333-0.94.72374782.871.1410754.26 PublicVC-.3519354-1.60-.3210182-1.15-.8021558-3.11-1.096251-3.42.24791391.07.50429281.77 Period1-.4628344-2.70-.8399836-2.74-.3250579-1.47-.4680691-1.09-.2929191-1.65-.5960352-1.94 Period3.52775093.19.2058490.65.5143132.73.30329770.88.28606341.69-.0774252-0.23 LifeScience.17065880.48.3304630.74.51640521.611.0784262.56-.1731282-0.54-.3843792-0.91 Internet.0197380.05.1061790.16.93981182.31.63476581.14-.3191376-0.89-.228669-0.40 IT.21177890.65.35525830.85.59987941.98.86853712.49.18103010.65.1532390.38 Trad.High-Tech.10422260.30.23076890.52.16431350.53.46143651.08.12398380.42-.0612172-0.14 NoofObs.267184401254298197 Wald/χ2/F-Test34.9538.2659.7855.6719.9837.57 Prob.0.00010.00080.0000.00000.02950.0010 R20.04820.07320.14270.15210.03830.0849 Notes:Orderedprobitregressionwithclusteredstandarderrorsclusteredatfirm-level.DependentvariableinmodeloneandtwoareallVETORIGHTS.Inmodel3and4, STRUCTURALVETORIGHTSisthedependentvariable,whileinmodel5and6itisthevariableOPERATIONALVETORIGHTS.VETORIGHTSisthesumofthefollowing vetorights:OPERATIONALVETORIGHTS,STRUCTURALVETORIGHTS,VETOASSETSALES,andthetwovetorightsagainstprofitdistribution,bothfortheboard andforshareholders.OPERATIONALVETORIGHTSisthesumofthevetorightsthatgoverntheentrepreneur’sactionsinthefirm:Avetoagainstchangesinthefirm’sline ofbusiness,avetorightagainstcertainfinancialdecisionssuchascapitalexpendituresortheuseofderivativeinstruments,avetorightagainstchangesinthefirm’sheadcount andveto’sagainstotherdecisions,i.e.againstlawsuitsonbehalfofthefirm.STRUCTURALVETORIGHTSisthesumofthevetorightsthatsecuretheVC’spositioninthe firm:Avetorightagainstchangesintheshareholder’sagreement,avetothatforbidsthefirm’sdissolutionandavetoagainstchangesinthefirm’scapitalstructuresuchas givingoutnewshares.ThevariableFINISHEDPRODUCTindicateswhetherthefirmhasaproductthatcanbesold.ThevariableROUNDindicatestheroundtheinvestment isin.TheFIXEDASSETRATIO(FAR)indicatestheratiooffixedassetstobalancesheettotalwherebyweusebalancesheetdataoftheyearprecedingtheyearofclosingof thecorrespondingfinancing.ThedummyAUDITEDBALANCESHEETtakesvalueoneifthefirmsbalancesheetisauditedornot.ThevariableREPEATENTREPRENEUR captureswhetherwefacearepeatentrepreneur.Wecreatetwointeractionvariables:VCEXPERT*EARLYSTAGEtakesvalueonewhentheVCinvestsinanindustryhestates tohaveexperiencein,whereastheEARLYSTAGEdummytakesvalueoneforseedandstart-upfirms.Wealsocreateaninteractiontermbetweenfirmsfinancedinthesecond period(1998-2000)andtheEARLYSTAGEdummy.WeclassifyeachVCaccordingtohistypeintothreecategoriesnamedINDEPENDENTVC,PUBLICVCandOTHERVCs. Thelattercategoryincludesbothbank(-dependent)andcorporateVCs.Also,weobservetheyearwhenthefinancingroundisclosedanddefinethreetimedummies.PERIOD1 takesvalueoneifthefinancingroundwasclosedduringtheearlyperiodofrelativelylowventurecapitalactivity,namelybefore1998,PERIOD2ifitwasclosedduringtheboom, i.e.between1998and2000andPERIOD3ifitwasclosedafter2000-aperiodofrelativedeclineandreorganizationoftheventurecapitalindustry.Moreover,weobservethe firm’sindustry:LIFE-SCIENCE,INTERNET,IT/TELECOM,TRADITIONALHIGH-TECHINDUSTRIESandOTHERINDUSTRIESarealldummyvariablesthatindicate theproject’sindustry.ThedummyGROWTHINDUSTRIESisadummyvariablethatindicateswhetherthefirm’sindustryisresearchintensive,thatiswhetheritisaBiotech, IT/TelecomsoraTraditionalHigh-Techfirm.
Table13:Theuseofvetorights AllVetoRightsStructuralVetoRightsOperationalVetoRights Model1Model2Model3Model4Model5Model6 βzβzβzβzβzβz Age-.0001049-0.01.00061230.07-.0014562-0.27-.0044083-0.86-.0022788-0.38-.0045343-0.49 Round-.0996004-1.49-.1999926-2.40-.0559065-0.52-.1555089-1.42-.1574665-1.90-.2026344-2.14 FAR.38291141.12-.0578902-0.15.20332040.75 RepeatEntrepreneur-.2069829-0.92.3713981.45-.5997309-2.69 AuditedBalanceSheet-.5057246-1.93-.2138377-0.69-.2985893-1.30 VCExpert*EarlyStage-.059061-0.22.06311990.18-.2135025-0.81 Periode02*EarlyStage-.4685228-1.32-.6892153-1.67-.3654291-0.97 IndependentVC.42498372.07.52634752.22.13942970.48-.414086-1.27.70426922.821.1013944.04 PublicVC-.3494675-1.55-.3817853-1.35-.7792035-2.91-1.126014-3.16.28067061.21.51086561.78 Period1-.4397657-2.61-.6953352-1.95-.4169182-1.82-.7637401-1.56-.3069154-1.74-.5370416-1.47 Period3.53904343.14.43713541.20.50427522.60.21116720.52.29731961.73.0925850.23 LifeScience.23234380.62.31627130.67.32902720.95.973042.08-.1050635-0.29-.3022622-0.68 Internet.12219570.28.39890050.62.7392861.65.78542091.36-.2656066-0.68-.1358946-0.24 IT.24736410.69.38572740.84.4076121.21.86326742.24.15332470.48.15400020.36 Trad.High-Tech.20678460.56.38962970.82-.0022771-0.01.40977570.92.18249720.55.0613680.13 NoofObs.262184396253287195 Wald/χ2/F-Test36.1540.3967.0660.4919.2842.55 Prob.0.00010.00040.00000.00000.03690.0002 R20.04610.07060.13810.15690.03560.0864 Notes:Orderedprobitregressionwithclusteredstandarderrorsclusteredatfirm-level.DependentvariableinmodeloneandtwoareallVETORIGHTS.Inmodel3and4, STRUCTURALVETORIGHTSisthedependentvariable,whileinmodel5and6itisthevariableOPERATIONALVETORIGHTS.VETORIGHTSisthesumofthefollowing vetorights:OPERATIONALVETORIGHTS,STRUCTURALVETORIGHTS,VETOASSETSALES,andthetwovetorightsagainstprofitdistribution,bothfortheboard andforshareholders.OPERATIONALVETORIGHTSisthesumofthevetorightsthatgoverntheentrepreneur’sactionsinthefirm:Avetoagainstchangesinthefirm’s lineofbusiness,avetorightagainstcertainfinancialdecisionssuchascapitalexpendituresortheuseofderivativeinstruments,avetorightagainstchangesinthefirm’shead countandveto’sagainstotherdecisions,i.e.againstlawsuitsonbehalfofthefirm.STRUCTURALVETORIGHTSisthesumofthevetorightsthatsecuretheVC’sposition inthefirm:Avetorightagainstchangesintheshareholder’sagreement,avetothatforbidsthefirm’sdissolutionandavetoagainstchangesinthefirm’scapitalstructure suchasgivingoutnewshares.ThevariableAGErepresentstheageofthefirmwhenthecorrespondingfinancingroundwasclosed.ThevariableROUNDindicatestheround theinvestmentisin.TheFIXEDASSETRATIO(FAR)indicatestheratiooffixedassetstobalancesheettotalwherebyweusebalancesheetdataoftheyearprecedingthe yearofclosingofthecorrespondingfinancing.ThedummyAUDITEDBALANCESHEETtakesvalueoneifthefirmsbalancesheetisauditedornot.ThevariableREPEAT ENTREPRENEURcaptureswhetherwefacearepeatentrepreneur.Wecreatetwointeractionvariables:VCEXPERT*EARLYSTAGEtakesvalueonewhentheVCinvestsin anindustryhestatestohaveexperiencein,whereastheEARLYSTAGEdummytakesvalueoneforseedandstart-upfirms.Wealsocreateaninteractiontermbetweenfirms financedinthesecondperiod(1998-2000)andtheEARLYSTAGEdummy.WeclassifyeachVCaccordingtohistypeintothreecategoriesnamedINDEPENDENTVC,PUBLIC VCandOTHERVCs.Thelattercategoryincludesbothbank(-dependent)andcorporateVCs.Also,weobservetheyearwhenthefinancingroundisclosedanddefinethreetime dummies.PERIOD1takesvalueoneifthefinancingroundwasclosedduringtheearlyperiodofrelativelylowventurecapitalactivity,namelybefore1998,PERIOD2ifitwas closedduringtheboom,i.e.between1998and2000andPERIOD3ifitwasclosedafter2000-aperiodofrelativedeclineandreorganizationoftheventurecapitalindustry. Moreover,weobservethefirm’sindustry:LIFE-SCIENCE,INTERNET,IT/TELECOM,TRADITIONALHIGH-TECHINDUSTRIESandOTHERINDUSTRIESarealldummy variablesthatindicatetheproject’sindustry.ThedummyGROWTHINDUSTRIESisadummyvariablethatindicateswhetherthefirm’sindustryisresearchintensive,thatis whetheritisaBiotech,IT/TelecomsoraTraditionalHigh-Techfirm.
Table 14: Liquidation Rights: Substitutes or Complements?
Staging Types
Put Option No Staging Milestones Rounds Mixes No. of Obs
Pure Equity
Notes: This table shows the relation of three types of liquidation rights: Staging, Debt and Put Options: The left hand side shows the use of certain types of securities used, including Debt-Equity Mixes and Pure Debt. For each type of security, the use of put options is analyzed, differentiated on the right by the type of staging encountered.
Table 15: Liquidation Rights: Substitutes or Complements II?
Put Option Debt Staging
Put Option 1
Debt -0.0358 1
Staging 0.0854* -0.1310*** 1
Notes: This table presents the pairwise correlations between the three liquidation rights used: Put-Options, Debt and Staging. Asterisks note the usual significance levels: * notes significance at the 10% level, ** at the 5% level and *** a at the 1% level.
Table 16: Relation of Exit Covenants and IPO Rights
IPO Rights
Notes: Summary statistics for 464 investment rounds into 290 entrepreneurial firms by venture capital funds. The table describes the relation of the number of IPO rights to the number of trade-sale rights. There is a maximum of two IPO rights (Piggy Back Rights and Priority Registration rights) while there are five relevant trade-sale rights: Information Duty, Preemption Right, Drag Along, Take Along and Anti-Dilution Protection.
Table17:Theuseofliquidationrights AllLiquidationRightsStagingandPuts Model1Model2Model3Model4Model5Model6Model7Model8 shedProduct-.2818199-2.22-.0789464-0.33-.322948-2.52-.1364364-0.58 -.0132683-2.56-.0197527-2.51-.0145466-2.66-.0595553-2.20 -.0437411-0.57-.0506219-0.68.06086220.54.04695310.43.01478550.19.00913610.12-.0205993-0.17-.0102302-0.08 nceSheetSize-1.76e-07-2.18-1.49e-07-2.03-4.68e-09-0.065.31e-080.74 tedBalanceSheet-.1634991-0.65-.1390859-0.68-.219225-0.79-.1416006-0.60 hDegree.56020412.67.56030842.62.48787432.13.4212711.81 enceBackground.27899790.57.279770.56-.2851738-0.76-.3304727-0.89 eatEntrepreneur.06942350.32.16786270.77.08167040.38.16849910.78 endentVC-.1603681-1.05-.1531585-0.98.08266180.45.17466090.95-.0376153-0.20-.0420743-0.22.16436390.63.19964730.70 VC.25551921.41.27128081.38.64750272.51.68198182.52-.1421654-0.61-.1464382-0.59.27007570.85.20220250.60 eriod1.31221381.89.28555951.66.61519692.68.55863342.43.20902551.06.16089350.80.56826932.11.48769691.83 eriod3-.0663058-0.48-.1662728-1.20-.0209104-0.11-.1221174-0.61.29945182.10.22689331.55.41680391.93.35680421.56 eScience.02354650.09.041910.17-.2906344-0.79-.5082034-1.33.38228291.50.41098291.60.16738640.39.04768080.10 ternet.14112670.48-.0421569-0.14.60684941.20.31071720.58.45704041.57.23362360.77.35730010.59.02631110.04 -.0019738-0.01-.0476248-0.21.182360.53-.0930828-0.26.3196941.45.30217861.31.4311941.14.27574380.66 rad.High-Tech.2456811.02.25112630.99.43519571.24.24087890.68.20058540.79.20113840.74.4179991.01.30794550.72 ofObs.378370183181378370183181 ald/χ224.6627.3247.2754.1921.5619.1521.3532.49 0.00600.00230.00000.00000.01750.03850.12590.0055 20.04040.03410.07380.09390.02900.02990.06000.0848 Notes:Orderedprobitregressionwithclusteredstandarderrorsatfirm-level.Thesumofallthreeliquidationrights(debt,staging,andput-options)isthedependentvariableinmodels1-4andcountsthenumber ofliquidationrightsavailabletotheVC.Thedependentvariableinmodels5-8isthesumofstagingandthepresenceofaputoption.ThevariableAGErepresentstheageofthefirmwhenthecorresponding financingroundwasclosed.ThevariableFINISHEDPRODUCTindicateswhetherthefirmhasaproductthatcanbesold.ThevariableROUNDindicatestheroundtheinvestmentisin.TheBALANCESHEET SIZEvariablemeasuresthesizeofthebalancesheettotalwherebyweusebalancesheetdataoftheyearprecedingtheyearofclosingofthecorrespondingfinancing.ThedummyAUDITEDBALANCESHEET takesvalueoneifthefirmsbalancesheetisauditedornot.Wealsoknowwhetheranyofthefoundershasabackgroundinengineering,whichwecodeasSCIENCEBACKGROUND.Ifanyofthefoundershasa PhDoradegreeabove,wecodethevariableRESEARCHDEGREEtotakevalueone.ThevariableREPEATENTREPRENEURcaptureswhetherwefacearepeatentrepreneurWeclassifyeachVCaccordingto histypeintothreecategoriesnamedINDEPENDENTVC,PUBLICVCandOTHERVCs.Thelattercategoryincludesbothbank(-dependent)andcorporateVCs.Also,weobservetheyearwhenthefinancing roundisclosedanddefinethreetimedummies.PERIOD1takesvalueoneifthefinancingroundwasclosedduringtheearlyperiodofrelativelylowventurecapitalactivity,namelybefore1998,PERIOD2if itwasclosedduringtheboom,i.e.between1998and2000andPERIOD3ifitwasclosedafter2000-aperiodofrelativedeclineandreorganizationoftheventurecapitalindustry.Moreover,weobservethe firm’sindustry:LIFE-SCIENCE,INTERNET,IT/TELECOM,TRADITIONALHIGH-TECHINDUSTRIESandOTHERINDUSTRIESarealldummyvariablesthatindicatetheproject’sindustry.Thedummy GROWTHINDUSTRIESisadummyvariablethatindicateswhetherthefirm’sindustryisresearchintensive,thatiswhetheritisaBiotech,IT/TelecomsoraTraditionalHigh-Techfirm.
Table18:ThedeterminantsoftheuseofExitClauses(1) FinishedProductAge BaseModelModel2Model3BaseModelModel2Model3 FinishedProduct-.1493539-1.01-.1777154-1.23-.1015913-0.54 Age-.0068243-0.87-.0098185-1.28-.0123546-1.57 Round.24487022.56.23753112.64 TradeSaleExpected.50750723.30.38979842.12.45121472.93.38151712.09 VCMajority.84097484.07.98184483.75.86640374.02.96197883.64 FAR.05504330.12.12186870.27 RepeatEntrepreneur.09503030.48.05888680.30 AuditedBalanceSheet-.08637-0.37-.0719711-0.32 Periode02*EarlyStage-.0763358-0.30-.0248796-0.10 IndependentVC.47229122.64.61846883.37.62291432.73.61648723.60.60605863.25.60775442.35 Period1.64259473.75.3875005-1.76-.3232705-1.05-.2892085-1.45-.3476953-1.60.59822012.61 Period3-.3408797-1.71.38499432.23.22476810.81.58065393.82.38789172.13-.2916226-0.95 GrowthIndustries.5534423.79.40829732.27.65018462.53.47709462.58.42620852.26.3329031.21 NoofObs.364321215355311213 Wald/χ2/F-Test118.23119.9796.82112.07116.80100.11 Prob.0.00000.00000.00000.00000.00000.0000 R20.09960.13120.13840.09570.12820.1359 Notes:Probitregressionswithclusteredstandarderrorsatfirm-level.DependentvariableistheEXITRIGHTSdummy.TheEXITRIGHTSdummyisthesumofthesale rightsfoundinthesample,thatisthesumofthedummyfortheexistenceforananti-dilutionprotection,theVC’spreemptionrightdummy,thedragandtake(tag)along dummiesandfinallytheinfodutydummy.ThevariableFINISHEDPRODUCTindicateswhetherthefirmhasaproductthatcanbesold.ThevariableROUNDindicatesthe roundtheinvestmentisin.TheDUMMYVCMAJORITYindicateswhethertheVChasthemajorityofvotingrightsinthefirm.TheDUMMYTRADESALEEXPECTED indicateswhethertheVCthinksthatatradesalecanbeexpected.TheFIXEDASSETRATIO(FAR)indicatestheratiooffixedassetstobalancesheettotal.Weusebalance sheetdataoftheyearprecedingtheclosingofthecorrespondingfinancinground.ThevariableREPEATENTREPRENEURcaptureswhetherwefacearepeatentrepreneur. ThedummyAUDITEDBALANCESHEETtakesvalueoneifthefirmsbalancesheetisauditedornot.Wecreateoneinteractionvariable:firmsfinancedinthesecondperiod (1998-2000)multipliedwiththeEARLYSTAGEdummy,wheretheEARLYSTAGEdummytakesvalueoneforseedandstart-upfirms.WeclassifyeachVCaccordingtohis typeintothreecategoriesnamedINDEPENDENTVC,PUBLICVCandOTHERVCs.Thelattercategoryincludesbothbank(-dependent)andcorporateVCs.Also,weobserve theyearwhenthefinancingroundisclosedanddefinethreetimedummies.PERIOD1takesvalueoneifthefinancingroundwasclosedduringtheearlyperiodofrelatively lowventurecapitalactivity,namelybefore1998,PERIOD2ifitwasclosedduringtheboom,i.e.between1998and2000andPERIOD3ifitwasclosedafter2000-aperiod ofrelativedeclineandreorganizationoftheventurecapitalindustry.Moreover,weobservethefirm’sindustry:LIFE-SCIENCE,INTERNET,IT/TELECOM,TRADITIONAL HIGH-TECHINDUSTRIESandOTHERINDUSTRIESarealldummyvariablesthatindicatetheproject’sindustry.ThedummyGROWTHINDUSTRIESisadummyvariable thatindicateswhetherthefirm’sindustryisresearchintensive,thatiswhetheritisaBiotech,IT/TelecomsoraTraditionalHigh-Techfirm.
Table19:ThedeterminantsoftheuseofDragAlongClauses(1) FinishedProductAge BaseModelModel2Model3BaseModelModel2Model3 FinishedProduct-.1056257-1.61-.1104368-1.56-.1016556-1.05 Age-.0034853-1.01-.0045966-0.80-.0057768-0.82 Round.0896112.36.08210992.29 TradeSaleExpected.18750732.37.13846321.39.15099361.86.12518281.24 VCMajority.40004464.41.44047034.06.41948264.58.44389064.03 FAR-.0141528-0.08.02522180.14 RepeatEntrepreneur-.0398557-0.44-.0370144-0.40 AuditedBalanceSheet-.00449460.04-.0069318-0.07 Periode02*EarlyStage.02076870.17-.0130185-0.12 IndependentVC.39494246.01.35653475.18.34833754.46.39659375.79.34842194.95.3596954.51 Period1-.2309599-2.54-.2388515-2.18-.1590632-1.01-.1941845-2.19-.2289167-2.09-.1882953-1.25 Period3.29365134.28.2141342.69.24660731.89.29576134.15.2114072.53.23232371.83 GrowthIndustries.188532.47.15784471.90.20529382.01.20061242.59.19023312.22.21847212.09 NoofObs.400350233391338230 Wald/χ2/F-Test99.6996.5979.7393.4089.0679.55 Prob.0.00000.00000.00000.00000.00000.0000 R20.29690.34360.36620.28570.34300.3568 Notes:Probitregressionwithclusteredstandarderrorsatfirm-level.Marginaleffectsareindicated.Dependentvariableisthedummydragalongthattakesvalueonewhen stagingtakesplaceand0otherwise.ThevariableFINISHEDPRODUCTindicateswhetherthefirmhasaproductthatcanbesold.ThevariableROUNDindicatestheroundthe investmentisin.entrepreneur.TheDUMMYVCMAJORITYindicateswhethertheVChasthemajorityofvotingrightsinthefirm.TheDUMMYTRADESALEEXPECTED indicateswhethertheVCthinksthatatradesalecanbeexpected.TheFIXEDASSETRATIO(FAR)indicatestheratiooffixedassetstobalancesheettotal.Weusebalance sheetdataoftheyearprecedingtheclosingofthecorrespondingfinancinground.ThevariableREPEATENTREPRENEURcaptureswhetherwefacearepeatentrepreneur. ThedummyAUDITEDBALANCESHEETtakesvalueoneifthefirmsbalancesheetisauditedornot.Wecreateoneinteractionvariable:firmsfinancedinthesecondperiod (1998-2000)multipliedwiththeEARLYSTAGEdummy,wheretheEARLYSTAGEdummytakesvalueoneforseedandstart-upfirms.WeclassifyeachVCaccordingtohis typeintothreecategoriesnamedINDEPENDENTVC,PUBLICVCandOTHERVCs.Thelattercategoryincludesbothbank(-dependent)andcorporateVCs.Also,weobserve theyearwhenthefinancingroundisclosedanddefinethreetimedummies.PERIOD1takesvalueoneifthefinancingroundwasclosedduringtheearlyperiodofrelatively lowventurecapitalactivity,namelybefore1998,PERIOD2ifitwasclosedduringtheboom,i.e.between1998and2000andPERIOD3ifitwasclosedafter2000-aperiod ofrelativedeclineandreorganizationoftheventurecapitalindustry.Moreover,weobservethefirm’sindustry:LIFE-SCIENCE,INTERNET,IT/TELECOM,TRADITIONAL HIGH-TECHINDUSTRIESandOTHERINDUSTRIESarealldummyvariablesthatindicatetheproject’sindustry.ThedummyGROWTHINDUSTRIESisadummyvariable thatindicateswhetherthefirm’sindustryisresearchintensive,thatiswhetheritisaBiotech,IT/TelecomsoraTraditionalHigh-Techfirm.
Table20:ThedeterminantsoftheuseofTakeAlongClauses(1) FinishedProductAge BaseModelModel2Model3BaseModelModel2Model3 FinishedProduct-.0371301-0.54-.0581767-0.82-.01977-0.20 Age-.0070012-2.11-.0102881-1.59-.0147067-2.09 Round.13185322.69.12028262.60 TradeSaleExpected.17498092.26.21309732.17.32191583.64.22230652.21 VCMajority.30250943.44.34814843.24.17969092.23.3645983.28 FAR.02072130.12.07305630.42 RepeatEntrepreneur-.029795-0.31-.040952-0.43 AuditedBalanceSheet-.0636917-0.60-.0145504-0.14 Periode02*EarlyStage-.1059925-0.90-.1418539-1.23 IndependentVC.2800873.90.22272742.83.18652852.05.25593433.39.17664322.11.17486771.87 Period1-.172481-1.90-.2130919-2.29-.1654196-1.28-.1336817-1.45-.1872342-1.96-.2055021-1.66 Period3.25921744.07.21276753.10.1183540.95.27878424.23.23194953.25.12984481.03 GrowthIndustries.17593772.17.18247922.14.27940732.60.16193591.93.18690312.07.25419892.35 NoofObs.399350234390338231 Wald/χ2/F-Test89.4864.6548.8485.9559.0248.04 Prob.0.00000.00000.00000.00000.00000.0000 R20.20290.23290.23880.19190.23180.2493 Notes:Probitregressionwithclusteredstandarderrorsatfirm-level.Marginaleffectsareindicated.Dependentvariableisthedummytake(tag)alongthattakesvalueonewhen stagingtakesplaceand0otherwise.ThevariableFINISHEDPRODUCTindicateswhetherthefirmhasaproductthatcanbesold.ThevariableROUNDindicatestheroundthe investmentisin.entrepreneur.TheDUMMYVCMAJORITYindicateswhethertheVChasthemajorityofvotingrightsinthefirm.TheDUMMYTRADESALEEXPECTED indicateswhethertheVCthinksthatatradesalecanbeexpected.TheFIXEDASSETRATIO(FAR)indicatestheratiooffixedassetstobalancesheettotal.Weusebalance sheetdataoftheyearprecedingtheclosingofthecorrespondingfinancinground.ThevariableREPEATENTREPRENEURcaptureswhetherwefacearepeatentrepreneur. ThedummyAUDITEDBALANCESHEETtakesvalueoneifthefirmsbalancesheetisauditedornot.Wecreateoneinteractionvariable:firmsfinancedinthesecondperiod (1998-2000)multipliedwiththeEARLYSTAGEdummy,wheretheEARLYSTAGEdummytakesvalueoneforseedandstart-upfirms.WeclassifyeachVCaccordingtohis typeintothreecategoriesnamedINDEPENDENTVC,PUBLICVCandOTHERVCs.Thelattercategoryincludesbothbank(-dependent)andcorporateVCs.Also,weobserve theyearwhenthefinancingroundisclosedanddefinethreetimedummies.PERIOD1takesvalueoneifthefinancingroundwasclosedduringtheearlyperiodofrelatively lowventurecapitalactivity,namelybefore1998,PERIOD2ifitwasclosedduringtheboom,i.e.between1998and2000andPERIOD3ifitwasclosedafter2000-aperiod ofrelativedeclineandreorganizationoftheventurecapitalindustry.Moreover,weobservethefirm’sindustry:LIFE-SCIENCE,INTERNET,IT/TELECOM,TRADITIONAL HIGH-TECHINDUSTRIESandOTHERINDUSTRIESarealldummyvariablesthatindicatetheproject’sindustry.ThedummyGROWTHINDUSTRIESisadummyvariable thatindicateswhetherthefirm’sindustryisresearchintensive,thatiswhetheritisaBiotech,IT/TelecomsoraTraditionalHigh-Techfirm.