Company Law and Corporate Governance of Start-ups in Germany: Legal Stipulations, Managerial Requirements, and Modification Strategies

Two topics which currently receivesubstantial interest are corporate governanceand start-up companies in the new economy.However, research combining both subjects israre. The present study aims to fill in thisgap because corporate governance is assumed toinfluence start-ups' performance. Sincepeculiarities of start-up companies exclude asimple application of extant governance wisdom,we develop propositions about corporategovernance structures of start-up companies inGermany – a country which has the most activestart-up scene in Europe but is also known forits far-reaching regulations of company law.This regulatory impact is most significantlyassociated with the choice of a legal form ofbusiness organization. While a certain legalform can provide some important advantages, itcan require at the same time corporategovernance structures which could imposeproblems on managing high-tech start-ups.Focussing the increasingly prevalent stockcorporation, we argue that this form, on theone hand, is advantageous for gaining resourcesand for the comprehensiveness of strategicdecision making. On the other hand, regulationsas the obligations to have collectiveresponsibilities in the management board and toset up a supervisory board can be expected todecelerate decision making and thus to putfirms at a disadvantage in high pacedindustries. We suggest that start-ups,therefore, make hidden modifications in orderto design effective corporate governanceconfigurations. The implementation of thesemodifications is facilitated by socialrelationships. First empirical insights intothe governance modalities of German start-upsare offered for illuminating our proposals.Thus, our study contributes to understandhow start-ups try to reconcile the governancedemands of both their business and their legalenvironment. Copyright Kluwer Academic Publishers 2002