THE ALLOCATION OF CONTROL RIGHTS IN FINANCING PRIVATE COMPANIES: VIEWS OF ESTONIAN PRIVATE EQUITY AND VENTURE CAPITALISTS

Abstract

This paper analyzes the allocation of control rights in financingprivate companies by private equity and venture capitalists in Estonia.Structured interviews with main providers of venture capital and privateequity were conducted to collect the information about the currentpractice in Estonia and to highlight topical problems in this field. Dueto the legal restrictions imposed on the preferred shares andconvertible debt, most Estonian venture capitalists use common shares infinancing high-growth firms and take similar risk position asentrepreneurs. Although, by using common shares, venture capitalistsobtain voting rights, the minority ownership by itself does not providesufficient protection of their interests. Venture capitalists increasetheir influence over the company through the active involvement insupervisory and management boards and detailed term-sheets which includedifferent vetoes and additional clauses.