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

Abstract

Two topics which currently receive substantial interest are corporate governance and start-up companies in the new economy. However, research combining both subjects is rare. The present study aims to filling this gap because corporate governance is assumed to influence start-ups' performance. Since peculiarities of start-up companies exclude a simple application of extant governance wisdom, we develop propositions about corporate governance structures of start-up companies in Germany - a country which has the most active start-up scene in Europe but is also known for its far-reaching regulations of company law. This regulatory impact is most significantly associated with the choice of a legal form of business organization. While a certain legal form can provide some important advantages, it, at the same time, can require corporate governance structures which could impose problems on managing high-tech start-ups. Focussing the increasingly prevalent stock corporation, we argue that this form, on the one hand, is advantageous for gaining resources and for the comprehensiveness of strategic decision making. On the other hand, regulations as the obligations to have collective responsibilities in the management board and to set up a supervisory board can be expected to decelerate decision making and thus to put firms at a disadvantage in high paced industries. We suggest that start-ups, therefore, make hidden modifications in order to design effective corporate governance configurations. The implementation of these modifications is facilitated by social relationships. First empirical insights into the governance modalities of German start-ups are offered for illuminating our proposals. Thus, our study contributes to understanding how start-ups try to reconcile the governance demands of both their business and their legal environment.