Venture Capital and the Use of Convertible Securities and Control Rights Covenants: A Fuzzy Set Approach

  • Maria do Rosario Correia German University in Cairo
  • Raquel F. Ch. Meneses Faculdade de Economia Universidade do Porto


Although venture capital is considered crucial for promoting economic development and innovation, not much has been done regarding the use of complex financing contracts in venture capital backed investments. In this study we investigate the use of convertible securities and control rights covenants for a sample of 15 Portuguese venture capital firms. We use an innovative methodology - a fuzzy set Qualitative Comparative Analysis - that considers both quantitative and qualitative factors for obtaining a solution that best fits the empirical data. Our results show that the use of convertible securities is affected by the anticipated severity of double-sided moral hazard problems. On the other hand, only a weak support is provided to the agency predictions regarding the use of control right covenants. Interestingly, the results reveal that convertible securities, unlike control rights covenants, are the most apt instruments to reduce costly double-sided incentive problems of a venture capital relationship