Equity Financing and Covenants in Venture Capital

Contract design is currently at the center of interest in venture capital research. The existing literature points out that German venture capital contracts differ significantly from Anglo-Saxon contracting practices in their choice of financial instruments and covenants. Contract comparisons have, however, so far neglected the complementary role covenants play in the allocation of entrepreneurial cash flow rights to the contracting parties. Against this background of diverse contract designs, this dissertation provides a first comprehensive analysis of cash flow Incentives implemented through financial instruments in combination with covenants in German venture capital contracts. The author begins with a contract-theoretical analysis of the cash flow effects Implemented by common contract designs. This is followed by an empirical study that presents new evidence on the contracting patterns used in the German venture capital market. Integrating theoretical and empirical findings, the author derives implications for an improved incentive-driven contract design In Germany. With its state-of-the-art analyses, the dissertation contributes extensively to the existing international theoretical and empirical literature on venture capital contracting. Furthermore, it provides significant value added for venture capitalists and portfolio companies operating in the German market. This dissertation makes a significant contribution to current venture capital research and will, without doubt, become widely accepted by and give impetus to venture capital researchers and practitioners alike. Professor Ulrich Hommel, Ph.D.