This paper empirically considers the role of preplanned exits (the investor's initial strategy to sell the investee firm via an acquisition or an initial public offering (IPO) at the time of initial contract with the entrepreneur), legal conditions and investor versus investee bargaining power in the allocation of cash flow and control rights in entrepreneurial finance. We introduce a sample of 223 entrepreneurial investee firms financed by 35 venture capital funds in 11 continental European countries, and these data indicate the following. First, preplanned acquisition exits are associated with stronger investor veto and control rights, a greater probability that convertible securities will be used, and a lower probability that common equity will be used; the converse is observed for preplanned IPOs. Second, investors take fewer control and veto rights and use common equity in countries of German legal origin, relative to Socialist, Scandinavian, and French legal origin. Third, more experienced entrepreneurs are more likely to get financed with common equity and less likely to be financed with convertible preferred equity, while more experienced investors are more likely to use convertible preferred equity and less likely to use common equity.
Bibliographical noteEarlier drafts of this work were distributed under different titles. We owe special thanks to the investors for providing the data, and to Jan Peter Kooiman, Enrico Perotti and Robert Westenberg for their helpful support. Participants at the American Finance Association Annual Conference were helpful in suggesting that this paper be written as a separate paper from earlier work entitled ‘Contracts and Exits in Venture Capital Finance’. We received helpful comments and suggestions from Patrick Bolton, Ronald Masulis, Peter Swan, and Li Anne Woo, and the seminar participants at the Aarhus Business School (March 2002), Copenhagen Business School (March 2002), the ABN AMRO Bank Conference on Private Equity Exit Strategies, Amsterdam (March 2002), the University of Alberta (April 2002), the American Finance Association Annual Conference, Washington DC (January 2003), University of Amsterdam (January 2003), Cambridge University Judge Institute of Management (January 2003), Center for Financial Studies, Frankfurt (January 2003), the University of Münster (January 2003), the University of Manitoba (February 2003), and the University of New South Wales (June 2003). Collection of the data was made possible with the generous assistance of the ABN AMRO Bank Corporate Finance Department, the University of Amsterdam Department of Financial Management, and a University of Alberta Pearson Fellowship. Any errors and/or omissions are our own.
- Preplanned exit
- Control rights
- bargaining power
- Law and finance