This paper investigates the role of national legal institutions on the choice of venture capital financing instruments. First, the author summarizes theoretical recommendations for the design of Venture Capital (VC) contracts to develop a checklist for necessary characteristics of a financing instrument. In a second step, these criteria are reviewed for several financing instruments with consideration of the German legal framework, namely convertible securities, preferred equity shares, and the unique German instrument: the silent partnership. It will be shown that preferred shares of a German limited liability company (GmbH) dominate other financial instruments as long as venture capitalists become actively involved within their portfolio firms. Passive VCs should provide capital in the form of silent partnerships as they can realize tax benefits. My results of this study largely explain the empirically observed financing patterns of Bascha / Walz (2002) and Zimmermann / Bienz / Hirsch (2005).
