Optimal design of venture capital financing contracts: the case of Portuguese, Spanish and German markets

This study aims to investigate the use of convertible securities and control rights covenants for a sample of 53 Portuguese, Spanish and German venture capital (VC) firms.

A relatively new methodology in business sciences – a fuzzy set qualitative comparative analysis – that considers both quantitative and qualitative factors is used for obtaining a solution that best fits the empirical data.

The results show that the use of convertible securities is affected by agency predictions, namely, the anticipated severity of double-sided moral hazard problems. On the other hand, a mixed support is provided to the agency predictions regarding the use of control right covenants. The results seem to suggest that control right covenants tend to play a different role from convertible securities in the optimization of contract design for VC-backed investments.

Existing literature on VC contract design is extended by providing a cross-border analysis to VC financing decision.