Economic Modelling 63 (2017) 215–225

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Economic Modelling
journal homepage: www.elsevier.com/locate/econmod

Determinants of control structure choice between entrepreneurs MARK
and investors in venture capital-backed startups

Lei Wanga, Fangzhao Zhoua, Yunbi Anb,
a
School of Business, Jiangnan University, Wuxi, Jiangsu 214122, China
b
Odette School of Business, University of Windsor, Windsor, Ontario, Canada N9B 3P4

A R T I C L E I N F O A BS T RAC T

JEL: This study examines two kinds of control structures in venture capital-backed startups. Based on incomplete
G32 contracting theory, we analyze the influence of various factors on these control structures in venture capital
D23 models, from the perspectives of investors, entrepreneurs, and startups. In particular, we show how factors such
G24 as bargaining power, monitoring costs, private benefits, and risk aversion impact the allocation of control rights.
Keywords: Using the survey data on a heterogeneous group of venture capital-backed startups in China, we empirically
Control rights allocation structure examine the impacts of various factors on the control structures of these enterprises. Based on the full sample of
Startups enterprises, we find that the stronger the venture capitalist’s bargaining power and the higher the monitoring
Entrepreneurs
costs, the more likely investors and entrepreneurs are to prefer joint control. Further, the greater the
Venture capitalists
entrepreneur’s financing need and private benefits, the more likely investors and entrepreneurs are to choose
Incomplete contracting theory
joint control. High-tech startups are more likely to choose a joint control model than those in traditional
industries. This is especially true for high-tech startups at an early stage of development. In addition, for high-
tech startups, the probability of choosing joint control shows a negative relationship with investors’ strategic
benefits and a positive relationship with investors’ risk aversion. Regarding startups in traditional industries,
investors’ strategic benefits and risk aversion have an insignificant impact on their control structures.

1. Introduction performance, but also serve as the mechanism and channel through
which entrepreneurs and venture capitalists manage total risk. The
Startups at an early stage of development need significant invest- selection of control structures in startups is the result of the negotiation
ment support for R & D and innovation. Typically, startups face greater process between venture capitalists and entrepreneurs, and reflects the
difficulties and higher costs in accessing financing through traditional purpose of control rights of the two participant parties. It is particularly
means and have to turn to venture capital (VC), which has been important for us to understand the role of various factors in determin-
growing since the 1950s. VC contributes significantly to the develop- ing the control structures in VC-backed startups. Previous research
ment of high-tech startups at an early stage of development (Carvell results see the incentives and benefits of venture capitalists and
et al., 2013). For example, in the US, venture capital invests in startups entrepreneurs as important factors affecting control structures. There
over 15 billion dollars every year (Chen et al., 2011). However, is a significant discrepancy between startups’ risks and the benefits of
startups’ high risk, asymmetric information, and commissioning issues control rights. While both entrepreneurs and venture capitalists play a
imply that venture capitalists and entrepreneurs must determine the critical role in startups, their contributions to these enterprises are
structure of corporate control despite incomplete contracting condi- difficult to measure. Given the difficulties of data collection, current
tions so as to protect their future. The allocation of control rights has empirical research concentrates on the description of board seats and
emerged as the key in startup governance with the intervention of VC, votes, etc., under the listed startup VC contract, while there has been
and is a key factor in the success of startups. little empirical research on the factors affecting the selection of control
Previous studies focus primarily on control rights allocation in VC- structures. In addition, previous empirical work in this area focuses
backed startups, and pay little attention to the resulting control primarily on European and US enterprises rather than enterprises in
structures in these enterprises. Control structures, as an important emerging markets.
tool of corporate governance, not only affect startups’ growth and This paper intends to provide a comprehensive analysis of how


Corresponding author.
E-mail addresses: wanglei0663@163.com (L. Wang), traveloguezfz@qq.com (F. Zhou), yunbi@uwindsor.ca (Y. An).

http://dx.doi.org/10.1016/j.econmod.2017.02.016
Received 22 July 2016; Received in revised form 23 January 2017; Accepted 15 February 2017
0264-9993/ © 2017 Elsevier B.V. All rights reserved.

Either the startup industries and those in traditional industries. we empirically examine the factors influencing the selection Fluck (2010) studies the relationship between control rights. and propose We find that the probability of high-tech startups selecting joint that the rights and statuses of venture capitalists and entrepreneurs control is greater. Xiong (2010) well as the bargaining power and control rights demand of various puts forth a third type of control mechanism that combines unilateral parties. Second. Thus. based on whether attitudes affect their selection of control structures. By combining unilateral control and contingent control. Entrepreneurs’ private benefits. Unilateral while those at later stages of development prefer contingent control control refers to the control rights of either the venture capitalist or structures. this paper will combine the theoretical analysis of The remainder of this paper proceeds as follows. we analyze the influence of various uration structures based on an incomplete contracting model. investor control. contingent control.2. Section 3 develops the hypotheses based on theories that affect the selection of control structure. to the second factor affecting their choice. capitalists pay to hedge risks. control structures refer for hedging risks can significantly facilitate the efforts of entrepreneurs. and analyze preferred stock. and by Schmidt (2003) explores contingent control structures in practice. and Walz (2013) proclaim that the differences between them under VC and further analyze whether various factors have a different impact on models are less than under other intervention mechanisms. Literature review structures have concentrated on venture capitalists. which combines the concept of contingent control and specifically. 2. to the allocation of startup control rights between venture capitalists This is necessary to endow venture capitalists with more cash flow and and entrepreneurs (Wang et al.L. following sections. control and bilateral control to offset the negative impact of adopting Third. we (2008) studies the application of financing tools such as common stock.. Our results indicate that the effects of various factors on the entrepreneur. incentive of control structures in Chinese industries. venture capitalists’ should be matched in such models. Unilateral control by entrepreneurs the heterogeneous control structures observed in VC-backed startups. and the startup corporate control structure in a VC model is promoting the development and sound corporate governance of these mainly divided into contingent control and joint control. This then leads unilateral control is vested in the venture capitalist or the entrepreneur. control structures of startups in high-tech industries and in traditional (2013) analyze the application and performance of three types of industries. convertible preferred stock. risk perception affects venture capitalists’ appeal for corporate rights.. or venture capitalists is a special case of contingent control. and have policy implications for control. tures—contingent control and unconditional control. de Bettignies perspectives of investors. Hellmann (1998) treats control rights inspecting entrepreneurs. de Bettignies (2008) sums contracts. In addition. Masulis and Nahata.. as well as shared contingent control. He also analyzes the mechanism through which these monitoring cost and risk aversion cost by the time they spend on control rights could be switched. and startups (Chen et al. and perception. and designs three dependent control right config- incomplete contracting theory. In addition. Our findings also provide insight into the optimal allocation of control unilateral control in this paper is classified as a part of contingent rights in different types of startups. and helps us understand 2010. Venture capitalists’ risk attitudes and the actions they take to mitigate 216 . the private benefits from control rights and the control rights and an entrepreneur’s control rights. 2009). we understand that startup control monitoring cost exhibit a significantly positive relationship with the structures can be classified as unilateral control. probability of startups’ choice of joint control. the largest emerging market in the world. Antonczyk and Salzmann (2012) find that venture capital- shows that a contingent control structure is better than other types. Types of startup control structures the chief factor is the venture capitalist’s risk attitude. and un- how the control structure choice is related to control right benefits as secured loans in control rights configuration contracts. using the survey data on 193 venture capital-backed startups only one method. which is the cost venture Adapting Hellmann’s (1998) theory. contingent control. structures in VC firms in developed markets. 2. entrepreneur or the venture capitalist first owns the control rights ments the empirical evidence as to various factors affecting control and then reassigns it according to observable corporate signals (Fluck. we first classify control structures into joint control and up extant unilateral control. based on the control right types and structures in startup joint control by investors and entrepreneurs. As far as venture capitalists are concerned. entrepreneurs. distinguish between two kinds of benefits of control rights. Further. They find that venture capitalists’ risk as a discrete variable that takes the value 0 or 1. in China. and reveal how various motivation. Cumming and Johan (2007) find that the suggestions proposed by venture capitalists According to incomplete contracting theory. secured loans. to achieve better control performance. binary right structures under a joint investment model. (2008) measure venture capitalists’ investor control. Wang et al. It is noteworthy that the risks to venture control is basically consistent with joint control. Section 5 discusses the empirical results. we divide capital model and bank-/public-funded venture capital model. Factors influencing startup control structure while Section 6 concludes. and startups. 2009). Andrieu (2012) capitalists in high-tech enterprises and in traditional industries are focuses on striking an optimum balance between a venture capitalist’s different. and joint control. Focusing on venture capitalists’ risk tingent control structure for startups under continuous changes. Our analysis comple. Both contingent control and unilateral control can be startups at an early stage of development tend to choose joint control defined as a discrete variable that takes the value of 0 or 1. Tan et al. After comparing the strategic benefits from VC investment in high-tech enterprises and factors influencing control structures under an independent venture other startups in traditional industries are different. and describe their characteristics. Section 4 describes the research design and the major variables in the regressions. Economic Modelling 63 (2017) 215–225 various factors affect the selection of control structures in VC-backed Cestone (2014) proposes a shared contingent governance structure of startups in China. and entrepreneurship. Therefore. based on contingent control. and controlling other factors during empirical research. 2014). high-tech and joint control. In particular. Ma et al. investment amount.e. from the entrepreneur control. ists’ risk attitudes and risk aversion affect their risk perception. i. Hirsch our sample firms into high-tech enterprises and traditional enterprises. while contingent control depends on whether a random choice of control structures may differ between startups in high-tech variable (signal) can be realized in the future. and examines two control struc- factors impact the control structure choice in this group of hetero. Section 2 provides startup joint control and contingent control to discuss the main factors a literature review. In the enterprises. degree of risk aversion. and Based on the literature. entrepreneurs.1. Hellmann (1998) is the first to proportionate control rights to encourage them to provide valuable propose two types of control structures—entrepreneur control and advice and suggestions. More control rights. and literature. factors on such control structures in venture capital models. Most studies examining the factors that influence corporate control 2. bargaining power. Unconditional geneous enterprises. tible securities. they also find that describes the method of implementing contingent control via conver. Jukka (2002) constructs a con.

In summary. a venture capitalist’s most characteristics of venture capitalists.) affect the invested 3. Meanwhile. Venture capitalists may allocate the major decision-making impact on control rights. and startups are significant contribution to a startup is value added and risk manage- key to determining the control structure in a startup. 2011). and amount of financing that entrepreneurs acquire. Based on the research of initial public aversion are concerned. On the other hand. directors. With regard to enterprises. startup Masulis and Nahata (2009) indicate that the strategic targets of entrepreneurs must share control rights with venture capitalists to company VC as strategic investors affect IPO enterprises’ allocation encourage VC investment.. and the realization of strategic targets would inevitably decline. The second factor is of venture capitalists in determining the board of directors and entrepreneurs’ private benefits. If venture capitalists’ cost to control startups angles and helps understand how the startup corporate control and monitor entrepreneurs is high. etc. control rights. When venture capitalists and entrepreneurs have a good long- important signal affecting corporate control structures. This is especially true for large of startups’ value on control structures from the viewpoint of venture investment and high-risk industries (Krishnan et al. 2007). (2013) find that venture 3. Wang et al. venture capitalists’ concern about startups’ control rights startups. the startups in which they invest determine corporate control struc. the stronger their ability to monitor entrepre- influences the control rights arrangement. Research hypothesis startups’ control structures (Terry and Frye. venture capitalists Zacharakis et al. The value-added services VC firms provide to private benefits affect cooperation between the two parties as well as startups influence the allocation of enterprise control rights (decision control structures. Hopp and Lukas (2014) reveal that venture negatively related to the demand for control rights. Given system and environment disclosing the “black box” relationship between venture capitalists conditions. 2009). it greatly reduces venture capitalists’ monitoring stockholders’ private benefits have also been found to have an important costs. monitoring. 2011). the greater the proportion of control rights they would seek. Their non-monetary strategic value is as important put forward hypotheses on the factors that influence startup control as the monetary value they bring to the table (Wang et al. corporate structures shows that the monitoring strength of venture ship between venture capitalists and entrepreneurs based on social capitalists affects the structure of the board as well as the control rights network and contracting characteristics. enced by asymmetry in information.g. venture capitalists’ risk preference is ture and corporate values. and that the complementary or that risk aversion and uncertainty are negatively related to venture competitive relationship between investors and entrepreneurs is an. Heughebaert and Manigart (2012) indicate the analysis of corporate governance structure after IPO. this financing from venture will adopt joint control (Wang et al..e. are interlocked with corporate value. 2010).. neurs promotes social interaction and also reduces entrepreneurs’ need 217 . monitoring cost of Therefore. which increases their cost of risk enterprises’ value from the perspective of strategic alliance. Venture capitalists try to improve their efforts and Wang et al. corporate governance. bargaining power. (2011). it does not offer a systematic analysis and empirical control. Baldenius and Meng (2010) analyze the impact those that are less experienced. 2007). After ing control rights arrangements. Drees et al. As far as venture capitalists with different degrees of risk corporate control structures. venture neurs and the less control rights venture capitalists would have. and aversion. capitalists’ risk attitudes (degree of risk aversion). Control rights are a significant tool of (strategic benefits) are key factors affecting startup control structures. value-added service. key factors affecting startup control structures. Correspondingly. Bengtsson and Sensoy. there is discrepancy in residual claims’ offering (IPO) enterprises supported by company venture capital. entrepreneurial financing power to entrepreneurs (Eldridge. both parties will prefer joint structure evolves. capitalists’ activities (the enthusiasm to participate) (Antonczyk and other important factor determining IPO corporate control structures.L. 2009. Based on capitalists’ signal effect. we ment and control. Hence. venture capitalists often hold more rights control structure and the monitoring strength of the board of directors (equity) in corporate governance structure (Terry and Frye. Entrepreneurs must share control rights with venture capi- conclude that venture capitalists’ strategic targets and the value of talists for returns (Cumming and Johan. and the monitoring costs and efficiency of control rights-centric corporate ownership structure is an effective way capable venture capitalists are higher than those that are less capable. Consequently. Kaplan and capitalists’ supervision strength/capability and forecast about potential Stromberg (2004) find that both internal and external risks signifi- risks impact their selection of control structures when analyzing the cantly increase venture capitalists’ control rights in the board of appraisal activities of startups’ investment stages. experienced VC firms will rely on stricter monitoring of startups than ing control structures. new term relationship. Lim and Cu (2012) analyze the relation. entrepreneurs. Empirical data from many countries show of control rights and equity pricing.. research of the factors that influence it. startups’ value is a key factor determin.. (2013) reveal that corporate value is an rights). for investors to implement monitoring via the board of directors. and this may even lead to a constraints and private benefits obtained from operating enterprises are situation where the enterprise is controlled solely by the entrepreneur. According to Terry and the higher is the probability that venture capitalists and entrepreneurs Frye (2009) and Krishnan et al. venture capitalists’ negotiating power and risk attitudes and entrepreneurs. and the two parties’ bargaining power startup entrepreneurs. entrepreneurs. the Apart from providing investment. (2010) find that the control structure is an important often begin monitoring startups after they acquire a proportion of the contracting arrangement to negotiate conflicts between venture capi. awarding effects and appraisal of control right values. Turcan (2008) finds that venture capitalists’ are basic elements in determining the control rights of non-human investment targets (i. Salzmann. 2012). Meanwhile. The participants’ risk attitudes are a main factor in determin- The third factor is venture capitalists’ venture targets. 2007).1. Drees et al. Byun et al. Economic Modelling 63 (2017) 215–225 risks (e. The higher the venture capitalists’ monitoring When it comes to entrepreneurs. An examination of the role capitalists affects their corporate control rights. 2013). 2012). Venture capitalists and startup control structures capitalists’ monitoring of startups affects the control rights they acquire when analyzing the relationship between corporate ownership struc. In this paper. the strategic benefits of investment) determine capital. Startup entrepreneurs’ capabilities and behaviors are greatly influ- tures. The structures from the perspectives of venture capitalists. Empirical research indicates that with a fixed investment amount. resource complementarity between venture capitalists and entrepre- and enterprises. With regard to risk attitude. it has been that investors’ bargaining power affects the appraisal of corporate value found that the monitoring of a VC-backed company is stronger than and configuration of control rights. (2012) conduct an empirical analysis of VC-supported help entrepreneurs avoid risk. and find that entrepreneurs’ (Sheu and Lin. the most important factor is the costs. the Under such circumstances.. The fourth factor is venture capitalists’ bargaining power. (2013) believe that a that of one not backed by VC. and test them empirically. Under a VC model. the control rights and cash flow governance structure Although the above literature review covers a discussion of the influence venture capitalists’ monitoring efficiency and corporate factors affecting startup corporate control structures from different values (Byun et al. The more private information venture capitalists have of talists and entrepreneurs.

When venture the larger share of benefits or contingent control offers optimal power capitalists’ monitoring costs. as portfolio investment. is selecting joint less likely to derive private benefits. investors tend to form a strategic alliance and managing the enterprises should also be high. Accordingly. and the more likely it is that the demand more corporate control and even change the management to management will be altered. Entrepreneurs’ private benefits are an important factor affecting the constraints on bargaining power can be more easily satisfied. Based on the capitalists’ strategic benefits and the probability of the project’s success above analysis. startups stand to gain more financing amount) and venture capitalists’ cost to monitor and manage intellectual strategic benefits from venture capitalists. For these two conditions to be met. and when cash flow added value and venture benefits. the venture capitalist’s or entrepreneur’s unilateral control is infeasible. A VC firm must configure control rights and income rights the enterprise and in bargaining power. benefits. That is. entrepre- tribution (Lindsey. If there is a big with entrepreneurs to take joint control of startups (Wang et al. namely. the more control is greater than under contingent control. if startups’ financing constraints are higher. entrepreneurs are sending out to venture capitalists. an entrepreneur’s value is an when entrepreneurs own less wealth.. Entrepreneurs will be willing to share corporate 2008). the more likely both parties are to choose joint control. 2005). Economic Modelling 63 (2017) 215–225 for self-protection. their entrepreneurs have to find a balance between equity and control rights. To high amount of financing. Hypothesis 2:. with an increase in enterprise value.. At the same time..3.L. Venture capitalists as profit-seeking participants will inevitably require more control rights to According to Tirole (2001). the expected return to avoid and even stop entrepreneurs from taking risks (Lim and Cu. and 2009). 1998. Venture capitalists in a proportion of the control rights to investors. startup entrepreneurs must transfer enhance their benefits. financing gap for entrepreneurs. 2008). neurs need a larger amount of financing from venture capitalists. the venture capitalists’ negotiation power is stronger. risk aversion costs. than contingent control are as follows. venture capitalists grows with an increase in the liquidation value of 2012). tiating power so there is an incentive to invest. unilateral control by the party with control beneficial to both parties (Wang et al. the greater the private benefits of control strategic targets. increasing the probability strategic alliance have a value-added function. ists may gain from an investment far outweigh its possible monetary startups are better off selecting joint control than contingent control. Hypothesis 1:. The only 3. startup entrepreneurs’ degree of social interaction. The stronger a venture and important for entrepreneurs. and venture capitalists’ costs of monitoring achieve strategic benefits. allocation.2. their concerns about control rights will be weaker. we have the following hypothesis: When a startup’s market liquidation value is high. Thus. and their private innovative project financing. and it is difficult to rights. it is more likely that joint control entrepreneurs are willing to transfer to VCs are fewer. namely. The greater the venture capitalists’ risk aversion. entrepreneurs are willing to transfer to investors are greater (Tan et al. and entrepreneurs’ private benefits bargaining power.. it would be necessary for entrepreneurs to transfer a larger equity pricing (Masulis and Nahata. 2010). 2012). venture capitalists’ corresponding mone- 3. One important startups is greater than the expected returns from the initial control benefit of a venture capitalist is the realization of strategic targets such rights of venture capitalists under contingent control (Wang et al. If entrepreneurs own more private wealth benefits may also increase greatly. technology window. namely. entrepreneurs’ monetary partial control rights to venture capitalists to ensure the success of benefits will grow with an increase in enterprise value. the more likely both parties are to choose joint control. which will lead to entrepreneurs being in a disadvantageous position 218 . The other is that the corporate rights the venture capitalists possess and the greater the total investment of venture capitalists (i.. the control rights that capitalist’s bargaining power. Venture Capital‐backed Enterprise Value and control structure effective way is for them to enter into joint control. bargaining power that calls for more efforts from the partners. the greater the financing the entrepreneur seeks management costs are high. venture higher the supervision and control cost. the bargaining power-based sharing of likely to acquire control rights and there will be a more frequent control rights and design of incentive contracts are lower than the substitution of startup operators (Hellman. 2008). Wang et al. or when they attach more importance to the strategic benefits We are also interested in whether entrepreneurs’ private benefits of investment. High private benefits from control rights will greater the bargaining power held by venture capitalists. will be chosen. and is also an important signal of ability that realized. With financial constraints. Therefore. concerns over control rights will be stronger and both parties are more When the private benefits they derive from control rights are lower and likely to select joint control (Turcan. The tighter a startup entrepreneur’s financial To sum up.. their financing constraints are VC firms’ strategic targets have an influence on control right claims and high. we have the following hypothesis: is small. the less likely it is that strategic targets are (Wang et al. selecting joint control of startups is feasible for venture capitalists and entrepreneurs. and enterprise liqui. they are more With regard to partnerships. the Enterprise value is the sum of enterprise performance. entrepreneurs should have a scale economies from the investment (Weber and Weber. Wang et al. On the contrary. Venture capitalists will need to and the amount of financing they demand is less. Thus.. 2007). the stronger is their capitalists’ strategic benefits. when entrepreneurs are very likely to derive private dation value are high. 2009). The efficiency of investment. they demand more investment important signal affecting the cooperation between venture capitalists from venture capitalists.. it is more difficult for them to realize their from venture capitalists). On are an important factor affecting the mode of startup control and the contrary.e. the more encourage entrepreneurs to take risks while venture capitalists will likely they are to hold control rights. On the other information are important factors affecting the alliance’s power dis. 2009). an investment are far less than the possible monetary benefits. This means that VC investment is more urgent and entrepreneurs (Baldenius and Meng. persuade them to intervene. The control rights that harming their own interests. When entrepreneurs are when they acquire a greater share from renegotiations. then VC investment is increase their control rights to oversee and prevent entrepreneurs from less urgent and important for entrepreneurs. The stronger the share from renegotiations accruing to venture capitalists under joint complementarities between investors and entrepreneurs. Entrepreneur and startup control structure tary and strategic benefits will also increase. the optimal selection is to share control rights. Under such circumstances. when venture capitalists’ continuous monitoring and constraints (i. hand. only when venture between investors and entrepreneurs to balance the two sides’ nego- capitalists have strong bargaining power in renegotiations. When the strategic benefits venture capital. they will have a small residual share in renegotiations under contingent control. when the strategic benefits that may accrue to them from governance (Helwege and Packer. risk diversification. 2010). the lower is the appraisal of startups. and resources and of joint control by venture capitalists and entrepreneurs. Under joint control. their risk aversion cost is high. The two conditions under which joint control is strictly better control rights with venture capitalists that can promote social interac. The first one is that the residual tion and enhance strategic and financial benefits. Thus. Therefore. On the other hand.e. 2009).

2012). However. 4. and 5—very significant (or very important). That left 71 enterprises from which VCs had not with. and training. we empirically examine seven and Technology Administration Departments in Wuxi. General manufacturing 26 13. The second phase tunneling behavior. degree of level managers. Therefore. this paper utilizes a binary variable tries such as restaurant chains. The final valid sample had 86 enterprises.580% negotiate conflicts (Zacharakis et al. Nanjing. Economic Modelling 63 (2017) 215–225 for negotiations on control rights. The higher the enterprise value. VC managers. Ehrhardt and Nowak (2015) lacking in information. and 15 were found to be seriously benefits derived from control rights. before a part of the questionnaire was modified.2. test. 2012) mainly represents their ability to 219 .1. 4— significant (or important). and the valid collection rate. Venture capitalists’ bargaining power. firms observations tion between venture capitalists and entrepreneurs. detailed description of sample enterprises.834% making it difficult to collect data on control structures. if one party’s Classification Number of Percentage of total bargaining power is too strong. Reputational benefit is especially important for enterprise startup liquidation. The questionnaire adopts the Likert scale and the numbers 1–5 denote the following: 1—completely insignificant (or completely unim- 4. Explanatory variables VC associations in Jinan. Questionnaire design We prepare and pre-test our first questionnaire by referring to 193 valid enterprise samples in two phases. JC=0. talist’s bargaining power.2. Empirical research design Size Small-size enterprises 85 44. and a part of the general in empirical research. Following Region Regional enterprises 132 68.1. Entrepreneurs’ private non-monetary benefits.. we now have the following hypothesis: Materials. Based on the above Intelligent services analysis. Table 1 reports the come after a second round of modifications based on issues in the pre. enterprises showed that VC firms withdrew from 12 enterprises. Large-sample questionnaire structures. non-monetary (strategic) benefits. return visit after two years was paid to 107 valid sample enterprises to perquisite consumption. Our follow-up of 107 recognition. and 15 were in their second or third rounds of investment. there is no public database of startup information.166% In China. Hefei. If joint control is collected from four cities in Eastern China (Jinan in Shandong involved in the cooperation between venture capitalists and entrepre- Province. Shenzhen.56%. enterprises State-owned enterprises 46 23.606% from professional VC firms on invested startups. 121 of which were high- existing research and deleting some questions. managers can enjoy benefits such as invested in. Central China’s Hefei in Anhui Province.135% Environmental protection Hypothesis 3:. Meanwhile. 3—general.1. We contacted 20 different types of VC firms via 4.2. the industries covered by our large-sample ques- type. education. That left 107 valid questionnaires that met the believes these benefits should contain reputational benefits in basic requirements of large-sample data analysis.642% 4.78%. we use survey methods to gather data Cross-regional investments 61 31. otherwise. the Internet. 52 were eliminated owing to non-cooperation.L. Variable selection portant). Shenzhen in Guangdong Province. in Jiangsu Province).1. it will bring conflicts during coopera. which include social status and collected questionnaires. Energy and 35 18. nine were declared bankrupt. This modified prise value. monitoring cost. a monetary benefits (the variable PB) from four aspects: social status. Entrepreneurs would choose to share Table 1 control rights with venture capitalists and establish a joint control Classifications of the Sample Enterprises. Questionnaire design and sample selection Large-size enterprises 45 23.435% that venture capitalists and entrepreneurs will choose joint control. 4. Our formal questionnaire tech and 72 were from traditional industries.2.881% Other industries 25 12.041% Medium-size enterprises 63 32. and Xi’an and the Science Based on our research hypothesis. inviting them to complete the 4. Considering the complexity of private startup definition or job positions.1. structure (Heughebaert and Manigart.953% 4. and extent of peer collect corresponding data for the second time. 2012). While there are many taxonomic studies on startup control tionnaire include emerging industries such as general high-tech and structures. and classifies control structures as contingent processing and manufacturing industries as well as traditional indus- control and joint control. reputation. Samples were JC to represent the type of a control structure. Wang et al. Dependent variable Since this paper is to examine factors affecting startups’ control 4. perquisite consumption and reputation by their corporate control The survey is divided into two phases. 31 enterprises fell short of the founders or family businesses. The collection rate addition to monetary and non-monetary benefits through the was 45.. the dependent variable is a measure of the control structure In this paper.472% Financial services 21 10. Among the benefits derived from control rights. and Nanjing and Wuxi neurs. According to questionnaires and provide feedback about the startups they had Jensen and Meckling (1976). and also from Western China’s Xi’an in Shaanxi Province and Wuzhou in Guangxi Province.393% Kaplan and Stromberg (2004). version was sent out by hard copy and e-mailed to senior management staff of 20 VC firms in seven cities. A preliminary interview was conducted of about 30 high.1. During this phase.2.316% Type Non-state-owned 147 76. In this case. including entrepreneur’s non-monetary benefits. the more likely it is Biomedical health care 24 12. This paper measures entrepreneurs’ non- was completed between July and December 2011. 4. Mueller (1989) points out that non-monetary completed between July and September 2009. The first phase was rights. There were a total of bargaining power (Zhao et al. occupational reputation.2.2. venture capi- Wuzhou.2. and other reasons. this paper adopts a dichotomy method that is widely used the Internet of Things. and VC project leaders of these 20 VC risk aversion. as well as enter- firms. Venture capitalists’ drawn. investment amount. 2—quite insignificant (or very unimportant). JC=1. 23. During Phase 1.544% sector Communications and 32 16. both sides choosing joint control of enterprises will be the best way to Industry IT industry 30 15.2. 450 benefits and monetary benefits are equally important in private questionnaires were sent out and 205 were collected. and factors.2.

this Bargaining) is measured by the residual claims acquired by venture paper controls enterprise size (the variable Size).1. upstream and downstream industry support. First. binary variable.L. opportunities for technology development and utilization. Empirical analysis this paper proposes two measures—willingness to invest and the strength of preference for benefits from risk as an indication of risk 5. representing factors with good convergent validity. With reference to the measurement of risk attitudes. 2012). 2005). patent pool effect. In different stages instead of dynamic sample data. the probability of startups selecting joint control is: Previous studies show that control structures are at the core of corporate governance.. Economic Modelling 63 (2017) 215–225 control through cooperation and the benefits of such cooperation Therefore. and uses maximum likelihood to estimate a nonlinear model. The strategic targets of VC firms should be Table 4 reports the Cronbach α coefficients of the factors involved. Warner’s uncertainty-risk aversion classified as joint control and contingent control. The dependent variable can only take the value 0 or 1 to indicate that an To ensure the reliability and validity of measurement variables. Weber and benefits (SB) technology innovation. this paper sets corporate factors as the control variables. Our validity analysis is divided into utilization. This method employs the defined standards of investor risk attitudes in China’s VC industry using the China The key issue in our empirical research is to examine the relative Venture Capital Research Institute questionnaire. Econometric model aversion (the variable RA). and is calculated by the difference Industry). Li and Guo (2009) find that risk attitudes can be measured by the degree of risk aversion. the measures of these variables. our dependent measurement from five cultural dimensions. linked to specific startups’ business activities. industry (the variable capitalists’ renegotiations (equity). and the in equity before and after negotiations. In this and degree of risk aversion in this paper mainly refers to the measures case. and also refers to probability of factors affecting startups’ control structure.2. independent variables and the dependent variable is nonlinear. and reveal how these factors impact the control structures of startups.2. (Heughebaert and Manigart. Thus. 5. Wang et al. utilizing internal technology platform. degree of peer approval Jensen and Meckling (1976). where Table 2 Explanatory variables. Weber (2005) developing new market. In capitalists’ ability to claim a share from renegotiations. diversified development.3. Thus. resource in this paper have good reliability. representing the probability of selecting joint control. Given the difficulties 4. In this paper. The purpose is to control the effects of these factors at the enterprise level. risk diversification. the effect of corporate (1 + exp(−JC )) (1) factors (especially corporate resources and capabilities) must be considered in empirical research.3. and their Logistic regression is applied when the dependent variable is a specific meaning and measurement methods are shown in Table 3. representing factors with good con- of scale. economies of scale. Table 2 presents regression analysis is employed. It (the variable line with the analysis of enterprise attributes in the literature. 1 p= . Venture capitalists’ non-monetary (strategic) of collecting startup data by time sequence. it refers to venture which help improve the prediction stability of our empirical model. investment choice willingness. Control variable contingent control. efficiency cross-loading of the indices. As control is Geert Hofstede and K. developing new markets. the relationship between measurement of VC firms’ non-monetary benefits. The measurement of other explanatory Therefore. the dependent variable JC takes a value 0 or 1. Chen (2009). variable JC is a binary variable that takes the value 0 or 1. economy of scope Venture capitalists’ degree of risk Risk attitude. which ensures no variable SB) from seven aspects: technology development. and industrial functions (Wang et al. development of new markets. (PB) Helwege and Packer (2009) Venture capitalists’ strategic Technology development window. research reveals that VC firms make investments based on measurement of our control variables is presented in Table 3.2. growth potential.E. 2012). market which are all greater than 0. the event occurs or does not occur. prises’ own resources and capabilities. upstream and downstream industry all indices reported in Table 4 are significant (P-value < 0. it may lead to a false conclusion. variables is based on appropriate statistical indicators. Validity and reliability analysis diversified development. 4.7. Hence.3. this three steps. 4. competitive advantages. investment portfolio. the selection of which also depends on enter. Variable Measures Sources of Reference Enterprises’ non-monetary benefits Social status. reputation. Second. core competence. if a linear probability model (for example.6. Li aversion (RA) and Guo (2009) 220 . (2010). economies factor load is greater than 0. the accumulated variance contribution rate for each factor reported in Table 4 is greater than 60%. business diversification.2. Monetary benefit is an important goal of VC firms. perquisite consumption. and economies of scope (Weber and Weber. vergent validity.4. risk-return preference Jaeger et al. Venture capitalists’ risk aversion. The meaning and addition. Chen (2009) analyzes the factors affecting risk attitudes and their impacts on startup behaviors. This implies that the indicators adopted strategy. commercialization of high-tech achievements. OLS and WLS) of used in the literature. Third. promoting internal Ernst and Young (2002). the factor loads used to calculate of technology platform utilization. Compared with 4.01). and economies of scope. with modifications as needed.2. we conduct an exploratory factor analysis during paper proposes to measure VC firms’ non-monetary benefits (the index simplification and single dimension check. In this paper. Each support. regional difference (the variable Regionality). this paper uses a logistic regression model. strategic benefits. we use startup samples at benefits. development stage (the variable Stage).

After completing index purification and reliability/validity analysis. 2: growth stage. otherwise.000 3. High social status of startups 0. we make a logarithmic where lg Investmentit = log(1 + Investmentit ) and lg Valueit = log(1 + Valueit ).304 Value 193 800.000 2. Variable description Variable meaning Measurement method Dependent variable JC Probability of choosing joint control Select joint control=1. Being able to realize startups’ diversified development strategy for VC 0.103 1.268 1.750 Venture capitalists’ non-monetary benefits (SB) 0.581 0. 0: traditional industries Regionality The regions in which a VC firm and a startup are located 1: both parties located in the same region. Scope for improving entrepreneurs’ occupational reputation 0.419 0.039 0. Which of the following best describes your private investment behavior 0.51% 1. Technology development opportunities for VC’s other invested enterprises 0.58% 1.819 3.021 (2) SB 193 1. 2: 200–1000 employees.799 64.000 1.000 3.845 2.000 1. The mean value and range of each variable + β6 lg Investmentit + β7 lg Valueit + β8 Sizeit + β9 Industryit + β10 Regionalityit are reported in Table 5.068 PB 193 1.716 3.000 1035.882 3.727 2. 3: maturity stage. Wang et al. you will earn higher returns 0.161 1878.796 2. 3: above 1000 employees Industry The industry that a startup belongs to 1: high-tech industries.786 4. The logistic The correlation coefficient and AVE (average variance extracted) regression model after logarithmic conversion is adjusted as below: values of variables. Entrepreneurs’ peer approval 0.068 5.000 0. after log conversion and model modification. are 221 .668 5.000 5.516 19669.000 0. If you bear higher risks.2. =0 Independent variables Bargaining The residual claims that a venture capitalist obtains from re.506 Stage 193 1.548 0.000 2. 0: parties located in different regions Stage The development stage of a startup 1: early stage. conversion to eliminate the impact of extreme values.558 1. Which risk category do you belong to? 0.000 4.810 Venture capitalists’ degree of risk aversion (RA) 0.000 10000.000 5. (2) are shown in Table 3.710 0.000 16264.802 Table 5 ⎛ p ⎞ Descriptive statistical analysis of variables. the distribution of financing and startup value (3) variables is quite asymmetric.502 + β6 Investmentit + β7 Valueit + β8 Sizeit + β9 Industryit + β10 Regionalityit Bargaining 193 0.000 2. Improving the technology platform utilization efficiency for VC’s other invested enterprises 0. 4: others Table 4 Questionnaire’s reliability and convergent validity. we measure the mean value of different indices of a factor to reflect the measured factor.000 3. Being able to realize scale economies for VC 0. Being able to develop new markets for VC 0.000 0.062 The definitions of the variables in Eq.502 Regionality 193 0. + β11 Stageit + εit . Descriptive statistics and correlation analysis Note: Variable definitions are in Table 3. Scale α coefficient Factor load Percentage of variance explained Entrepreneurs’ non-monetary benefits (PB) 0.046 + β11 Stageit + εit Monitoring 193 1.970 Size 193 1. and the average value of each variable is far greater than its mean value.L. Providing upstream and downstream industry support for VC’s other invested enterprises 0. JC = ln ⎜ 1 − p ⎟ = β0 + β1 Bargainingit + β2 Monitoringit + β3 RAit + β4 SBit ⎝ ⎠ Variable N Minimum Maximum Mean Std.808 72. Calculated by the difference in equity value before and after a venture negotiations (equity) capitalist possesses equity Monitoring The costs that a venture capitalist pays to monitor startups Calculated by the number of times a venture capitalist checks enterprise finance reports every year RA The cost to venture capitalists for evading risk Likert Scale SB Non-monetary benefits accruing to venture capitalists from a Likert Scale startup PB Non-monetary benefits accruing to entrepreneurs from a Likert Scale startup Investment Venture capitalist’s investment amount in a startup In tens of thousands of RMB Value Preliminary evaluation of a startup’s market value In tens of thousands of RMB Control variables Size Measured by the number of employees in a startup 1: < 200 employees.000 100000.000 3.150 0. Deviation + β5 PBit JC 193 0.643 Industry 193 1.161 1.082 RA 193 1. Being able to realize scope economies for VC 0.000 5. According to Table 5.69% 1.785 1. We conduct a descriptive statistical analysis of the LogitP = JC = β0 + β1 Bargainingit + β2 Monitoringit + β3 RAit + β4 SBit + β5 PBit variables of logistic regression analysis model to find the extreme value and make the conversion.000 1. Therefore.851 6.802 4.767 7. Excellent perquisite consumption that entrepreneurs enjoy 0. Economic Modelling 63 (2017) 215–225 Table 3 Meaning and measurement method of variables. Investment 193 150.000 5.000 1.719 61.

367* -0.674** 0.183 -0.535 0.68) RA 0.502 0.121 1. greater than 0.948*** 7.487 0. relationship of variables.471 0.0 Full-sample multivariate logistic regression analysis of control structures. With regard the 12 variables in this study are between 0.494** (0.367* -0.808×0.69) Bargaining 0. respectively.132 Constant 0.495** 0.088 -0.335 (0.72) Regionality 0.. but fails of the correlation coefficient.425 0.129 To test our hypotheses.094 -0. However. *.305 0. so we further test the discriminate validity of Model M1 considers only the impacts of the control variables (size.234 0. we note that the AVE values of high-tech startups are more likely to choose joint control. distribution reflected in average values and standard deviations is in financial services.088 0.75) Industry -0.808).6. The results show that a correlation between factors particularly interested in investing in high-tech enterprises.509** (0.362* 0. Second. variables. the AVE values of all variables are greater than the squared value coefficient is -0.68.276** 5.208 0. Third.326 0. and *** indicate significance at 10%. *. thus affecting the two parties’ selection of Note: Variable definitions are in Table 3.808** (0. and educational training.577 19. The results indicate that enterprises’ industry the squared value of the correlation coefficient between variables control variable has a significantly positive coefficient. The regression coefficient of 0.533 3.470** -0.290 0. Wang et al.632 0.733* 3. This Square difference will affect various participants’ demand for control rights and bargaining power.092 1.417 0. see whether and how the selection of control structures differs in high- It is noteworthy that the correlation coefficients reflect the inter. we first run the regression with the full Regionality -0.675 0.. These different benefits of control rights have a Square Nagelkerke R 0.253 -0.976 10. Therefore. and *** indicate significance at 10%.727*** 10.231 0.618 1.564** 0.017 0.75) SB -0. and uses a stepwise regression analysis to test the relation- ship between startup control structures and their explanatory variables. The regression coefficient of mandatory meaning.496** -0.72) Size 0. respectively.049 -0. minimum of 0.426* (0.382* -0.313 0.164 -0.017 (0.808. The data invest greatly in traditional industries.458** (0.319 0.346 0.198** 4.882 1.496** -0.368 Industry 2.316 sample.069 -0. 2004). the impacts of the four variables of bargaining power.68. smaller than the minimum AVE value of 0. and 1%.154 -0. indicating that (Shook et al.709** -0.505** 4. Venture capitalists’ risk attitudes PB 0.023 -0.867 enterprises and enterprises in traditional industries. we line with the normal distribution. the correlation coefficient often reflects the comprehensive function of two variables in multiple ways. **.6529 (0.68) Value -0. in China. while the correlation coefficient among variables is monitoring cost.791 -0. all the variables have good the significance test. Thus. These lg_Investment 0. restaurant chains. tech industries and in traditional industries. and investment amount are in between 0. the positive/negative value and significance level of correlation The full-sample-sized logistic regression results of 193 startups’ coefficients can only be a reference for final analysis.736** 0. Consequently. without too much control structures are reported in Table 7. we divide the full sample into two groups: high-tech Stage -0.606*** 11.947 -0.3. the risk to a venture capitalist investing in high-tech SB -0.582 1. M1 M2 M3 Coefficient Wald Coefficient Wald Coefficient Wald 5. with a maximum of 0.136 0.76) PB 0.497** (0. which provides a good basis for the analyze high-tech enterprises and traditional enterprises separately to next step of data analysis.662** 0. Then.817 1. they also and confirm that the discrimination of factor design is good. From Table 6. The correlation coefficients of some variables are joint control in the model is relative to the default contingent control. and development stage) on startup is to examine whether the AVE values of all variables are greater than control structures. The numbers in parentheses are the AVE (average variance extracted) values of each variable.020 (0.219 control rights to avoid risk (Wang et al.170 risks affect their monitoring costs.115 -0.242 0. 5. such as general manufacturing.138 10.737 and monitoring costs will affect their demand for the protection of lg_Value -0. 5%. the regression coefficient of the discriminate validity.585 regressions with these two subsamples separately.831 -0.701 varied impact on the mechanism and extent of risk protection. 5%.083 -0.3.190 -0.71) Note: Variable definitions are in Table 3.537** 0.168 -0. JC Bargaining Monitoring RA SB PB Investment Value Size Industry Regionality Stage JC (0.346 0. control structures. 222 .L. venture capitalists’ strategic benefit variable is still negative but The logistic model should be adopted for specific regression analysis so as to further reveal the impact of factors on startup control Table 7 structures.74) Stage 0.339 benefits from control rights and the strategic benefits from VC likelihood investment in high-tech enterprises and other startups in traditional Cox & Snell R 0. and run the Bargaining 0.907 reasons.250 0. This paper adopts the logistic regression model in SPSS16.096 -0.394* 0.626** 0.092).603** 0.095 -0.078** 5.808. We do this for three RA 0.362 0.257 0.413** 60.037 -0. with a to model M2. In model M3.1.681 2.71) Monitoring 0.627** 0.621** (0.383* -0.166** 3.318 Monitoring 0.074 1. All the regression coefficients are positive maximum squared value of correlation coefficient among variables is and significant at the 1% or 5% level. First. Full-sample empirical analysis Thus.963 20.735** 0.964 enterprises is much higher than that in traditional industries.196** 4.065 -0.317 0.76. which is consistent with expectations.68 and 0.399 5. regional differences.442* 0.635*** 9.106 -0.521 industries are different.274 0.476** -0.363* -0. reported in Table 6. venture capitalists’ strategic benefit variable is negative (the estimated Thus.238 -0. degree of risk aversion. The most widely used method to test discriminate validity industry.231 (0.186 0.70) Investment -0. software. the private -2 Log 32.106 -0.363* 3. the line with our expectations.572 0.017 and 0. while venture capitalists are and 1%. 2009). Economic Modelling 63 (2017) 215–225 Table 6 Correlation coefficient and AVE values. Model estimation and statistical analysis Size 0. **.130 0.

The regression coefficient of startups’ value variable is Table 9 reports the results of the multivariate logistic regression negative. consistent with expectation. The probability of high-tech startups’ control.973*** 11. and 1%.866*** 13.719** 5. and these estimated coefficients are positive. the traditional industries. and *** indicate significance at 10%.086 -0. while that of the ability of startups in traditional industries selecting joint control. However. the impacts of high-tech startups at a later development stage selecting contingent these three factors are not statistically significant.097 0.437 0. while the regression coefficient of startups’ private benefits is positive.908 2.989 10.628*** 5.073 Constant 0.867 RA 0.933 2.089 -0. *. All Our analysis shows that entrepreneurs’ private benefits. Enterprise value and venture capitalists’ strategic benefits exhibit an The estimated coefficient of the venture capitalists’ strategic benefit insignificantly negative relationship with the probability of selecting variable is negative.134 2.525*** 7. with 72 enterprises in traditional industries. degree of risk aversion. and significant at the 1% level.072 0. of which venture capitalists’ venture capitalists’ bargaining power. Entrepreneurs’ private benefits.351 0.579 20.125*** 10. which is consistent with our hypoth- early development stage selecting joint control is higher.291 4.979 PB 0.825 3. Venture capitalists’ degree of risk aversion and coefficient of entrepreneurs’ private benefits is positive. M1(a) M2(a) M3(a) M1(b) M2(b) M3(b) Coefficient Wald Coefficient Wald Coefficient Wald Coefficient Wald Coefficient Wald Coefficient Wald Size 0. structures.459 -0.576 0.813 Size 0.01 -2 Log 33.181 Stage -0. contrary to expectations. consistent with expectations.283*** 7.299** 4.022** 6. the effect of the entrepreneurs’ monitoring cost variable Table 8 reports the empirical results of the multivariate logistic strengthens.160 Bargaining 1.464 Cox & Snell R 0.116 -2 Log likelihood 33.709 0.23 PB 0.827 0. and significant at 5.514 0. degree of hypotheses. power.278 0.129 0. The regression coefficient of venture entrepreneurs’ control variables fail to show a significant impact. and fails the significance test. and degree of risk aversion are in line with venture capitalists’ bargaining power. monitoring cost. investment amount. while it has 223 .329 0. degree of risk 5% level. The degree of risk of startups monitoring cost pose a significantly positive effect on the probability of in high-tech industries is high. and significant at the the four variables of bargaining power.802*** 7. investment amount.316 0.278 -0.230 -0. but insignificant.431** 5.353 -0. In 5.771 0. In M1(b). coefficient of the venture capitalists’ investment amount variable is negative.651 0. and investment amount are in line with expectations.738 0. aversion.889 2.585*** 12.3.727 Square Square Note: Variable definitions are in Table 3.686 likelihood Cox & Snell R 0.997 10. Therefore. and *** indicate significance at 10%.252** 5.973 Monitoring 0.375 -0. respectively.630 0.168 -0.890 -0. the the 5% level. and investment amount significantly positive relationship with the probability of startups in variables are significant at the 1% level. Venture capitalists’ in- monitoring cost variable is significant at the 5% level.377** 5.726 0. All regression coefficients are positive.570 lg_Investment -0.618** 4.518 Nagelkerke R 0. monitoring cost.214** 4.279 Regionality -0. control vari- Our analysis of the full sample shows that there is discrepancy in ables do not seem to have a significant impact on the selection of joint enterprise control structures. Wang et al.221 0.193 20. Empirical analysis of subsamples in high-tech industries M3(b).325 0.317 0. of which venture risk aversion. the degree of risk aversion in and venture capitalists’ strategic benefits pose a significantly negative high-tech industries has a greater impact on control rights. insignificant.638 lg_Value -1.409 5. and An enterprise’s development stage.3. and significant at the 1% level.396 Bargaining 0. and significant regression coefficient of the enterprise development stage control at the 1% level. **. 5%.46. In M2(a).459 Monitoring 0. 5%.698 0. consistent with expectations. The impacts of variable is negative.349*** 7. effect on the probability of high-tech venture enterprises selecting joint control.798 19. Note: Variable definitions are in Table 3.229 SB -0.091 lg_Investment 0.157 1.262 0.722** 3. which is consistent with our expectation. degree of risk aversion. The regression coefficient of the enterprise value variable is negative and significant at the 5% level. and significant at the 5% level. The degree of risk control is higher.535 Regionality -0. and enterprises in which they have invested.432 0. while the relationship with the probability of startups’ choice of joint control.233 1. enterprise value variable is negative. In M2(b).145 2.159** 3.537 0.2. the private benefit is positive.861 lg_Value -0.643 0. In M1(a). contrary to expectations.969** 4. and monitoring cost exhibit a significantly positive capitalists’ bargaining power is significant at the 5% level. venture capitalists’ aversion reflects venture capitalists’ uncertainty of the benefits of the bargaining power. consistent with hypotheses. and 1%.176 9. for startups in traditional industries. degree of risk aversion.591** 6. 0.356 10. respectively. *. contrary to expectations. Enterprise value industries is relatively low. while the coefficient of the traditional industries selecting joint control.126 3.357 -0. **.817 0. with its regression coefficient positive and significant at regression with 121 startups in high-tech industries.3.313 0. consistent with strategic benefits show an insignificant relationship with the prob- the expectations. the impacts of the three variables of bargaining selection of joint control is greater.539 1. monitoring cost and risk aversion variables fail the significance test. The joint control. Entrepreneurs’ private benefits.114 -0.282 19. while that of startups in traditional high-tech venture enterprises selecting joint control.415 2.644 2. The venture vestments and enterprise value have a significantly negative relation- capitalists’ strategic benefit variable is negative and significant at the ship with the probability of selection of joint control by startups in 5% level.483 1.362 SB -0.762 Constant 0.383 0. and monitoring costs all have a bargaining power.L.551 Square Square Nagelkerke R 0. Empirical analysis of subsamples in traditional industries the 1% level. In M3(a). Economic Modelling 63 (2017) 215–225 Table 8 Table 9 High-tech industry samples’ multivariate logistic regression analysis of control Traditional industry samples’ multivariate logistic regression analysis of control structures. strategic benefits variables all have a significant effect on the control Our analysis shows that the probability of high-tech startups at an structures of high-tech startups.952 0.494 0.112 RA 0.326 Stage -0. while that of esis.

as well startups in traditional industries. and that these impacts can selecting joint control. Yan and Fei (2007). while the strategic 82 (4). G. control structures in our empirical analysis. the value of Proceedings of the International Conference of the French Finance Association (AFFI). enterprises does not show a significant influence on the selection of Antonczyk. The reputation. Optimal allocation of control rights in venture capital contracts. 2010. Econ. and de Bettignies (2008) find unilateral control or contingent control This paper examines the influence of the characteristics of venture has advantages over joint control. platform support is noticeable. 2) Overall. Available at SSRN: 〈http://ssrn. Therefore. the venture capitalists’ bargaining power. this analysis is conducted from the perspective of incomplete contracts. Research on these issues requires the introduction of selection of control structures. paper we classify startup control structures into joint control and neurs or venture capitalists possess the control rights. Importantly. 3) For be different in high-tech enterprises and traditional enterprises. In traditional industries. This can be due to the impact of the degree of VCs’ risk aversion in high-tech enterprise following two reasons. there is a lack of an effective pricing mechanism in References China’s high-tech enterprises. from the perspective of corporate governance. and it is easier to contingent control. and strategic benefits have However. 584–619.com/abstract=1833417〉. indicating investment risk in high-tech enterprises to be much higher than that in that the development stage of startups in traditional industries is not traditional enterprises. Rev. research on startup control rights under incomplete con- an insignificant impact on the probability of startups choosing joint tracts ignores factors such as cooperation. Conclusion venture capital-backed startups. investment amount. startup could be more effective. that are at an early stage of development to effectively control and technological uncertainty and human capital’s high heterogeneity. Second. reassign control based on the changing dynamics during the growth Using a dichotomy method. capitalists’ degree of risk choose joint control while those at later stages of development prefer aversion and bargaining power have significant impacts on the selec- contingent control structures. venture capitalists and tion of control structures of invested enterprises. it may be caused by the analysis. R. 389–416. these two types of non-pecuniary benefits of control. as far as the development stage of enterprises is to achieve strategic objectives. and entrepreneurs’ private non-monetary benefits impact the development stage of startups. economies of concerned. since the returns in high-tech industries is particularly scope. However. but not significant. particularly those at an early stage factors such as venture capitalists’ bargaining power. Similar to most previous studies on enterprise control structures. In: data fail to reflect the real value of startups. we find that insignificant impact on the selection of startup control structures. and strategic different. the prospects and expected benefits structures into contingent control and unconditional control. venture capital are different. we find that joint control is venture capital-backed startups. Our overall findings imply that many factors can impact the benefits all have a significant impact on the probability of startups selection of control structures in startups. in this of startups in traditional industries are less variable. T. the success of traditional industries is not significant. and unpledged property in high-tech enterprises cause the traditional industries is still negative. venture capital. In contrast with Kaplan and industries’ startups. we investigate how preferred by high-tech enterprises. In the mechanisms through which these two types of non-pecuniary high-tech industries. the strategic effect of investment on 224 . we find that entrepreneurs control structures in Chinese startups. the degree of risk aversion of venture an important factor for venture capitalists. This paper confirms the existence of private benefits are greater. 2012. On the other hand. venture capitalists’ degree of risk aversion. Therefore. However. Salzmann. survey sample Andrieu. Therefore. it is an important area for future control structures show significant differences between startups in research. the more likely they are to choose contingent Stromberg’s (2003. Wang et al. hence. depending on the types of startups and the value. On the other hand. and the reputation of control. Again. esis. Signaling firm value to active investors. our analysis shows that this classification stages. More specifically. First. high-tech industries and those in traditional industries. The coefficient of startups’ development stage in specificity. Either entrepre. 1) The probability of high-tech startups choosing joint control as assumed by Schmidt (2003) and de Bettignies (2008) in their is greater. In addition. such as industry support. Corporate venture capital investments are Furthermore. they also tend and Nahata (2009) find that the benefits of control affect the allocation to choose joint control when entrepreneurs' financing amount and of control rights in enterprises.L. The reasons are as follows.. A. using the survey data on capitalists and entrepreneurs on the selection of control structures in heterogeneous enterprises in China. Venture capital and risk perception. Meng. Account. Stud. Economic Modelling 63 (2017) 215–225 a lower impact in traditional industries. Tirole (2001) docu- entrepreneurs prefer joint control of startups when the former have ments two types of non-pecuniary benefits of control. High-tech startups at an early stage of development tend to theoretical framework. which is consistent with our hypotheses. degree of risk aversion. degree of risk aversion. 2012. while the main purpose of general uncertain. of development. benefits of control impact the selection of control structures are itoring costs.. only the effects of venture capitalists’ as in developed markets and emerging markets. which is beyond Our empirical analysis indicates that factors affecting the choice of the scope of this study. effect of high-tech industries’ technology window and technology Baldenius. while Masulis stronger bargaining power and higher monitoring costs.C. leading to a more pronounced is contrary to our hypothesis and significant. both in theory and in practice. The impact of investment capitalists investing in high-tech enterprises to hedge risk is far higher (enterprises’ financing amount) on enterprises in traditional industries than that in traditional enterprises. The implication of this finding is that joint control financing amount. relational contract theory and human capital theory. making it difficult to determine a fair value for startups.J. venture capitalists tend to choose joint control of enterprises venture capital investment is to obtain financial benefits. differences in the scale of investment needed in different industries. bargaining power and monitoring cost are consistent with our hypoth. 15 (3). the overall investment amount in traditional industries is three types and Fluck (2010) and Gestone (2014) who classify control relatively low. Schmidt (2003). and further shows ists’ strategic benefits and the degree of risk aversion have an that their size varies in different enterprises. control rights in venture capital contracts. and economies of scale. The main conclusions are as in the Chinese market are generally risk averse. trust. our main focus is on the way in which various factors impact the selection of control structures in 6. monitoring cost. while other factors such as the stage of development of startups. In addition. Bus. Inspired by de Bettignies (2008) who divides control structures into Namely. On one hand. X. which means that the strategic benefits in high-tech strategic benefit targets between corporate venture capital and general industries are more significant than those in traditional industries. the more venture capitalists invest in traditional is appropriate for the analysis of this type. high supervise startups.... rather than risk neutral follows. 4) We find no significant impact of enterprise value on the the two parties. mon. strategic benefits. The heterogeneity of industries venture capitalists’ investments in high-tech startups brings greater causes great discrepancy in venture capitalists’ strategic benefits. 2004) analysis of the structure and allocation of control for the sake of exit or unilateral control. J.

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