Venture Capital Finance: A Security Design Approach
AbstractThis paper characterizes the optimal securities for venture capital finance in an environment with multiple investment stages and double-sided moral hazard in the relationship between entrepreneurs and venture capitalists. We show that if the conditions relevant for continuation into later stages are verifiable, the optimal security gives the venture capitalist a constant share in the success return of the project over a predetermined set of continuation states. Otherwise, the parties sign an initial start-up contract that is later renegotiated. In this case, in order to minimize the incentive distortions associated with the burden of early financing stages, the optimal start-up security gives a zero payoff in low profitability states and thereafter an increasing share in the success return of the project. ( JEL: D92, G24, G32).
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Bibliographic InfoArticle provided by Springer in its journal Review of Finance.
Volume (Year): 8 (2004)
Issue (Month): 1 ()
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Web page: http://springerlink.metapress.com/link.asp?id=111870
Other versions of this item:
- Repullo, Rafael & Suarez, Javier, 1999. "Venture Capital Finance: A Security Design Approach," CEPR Discussion Papers 2097, C.E.P.R. Discussion Papers.
- Repullo, R. & Suarez, J., 1998. "Venture Capital Finance: a Security Design Approach," Papers 9804, Centro de Estudios Monetarios Y Financieros-.
- E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
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