Start-ups Defined as Portfolios of Embedded Options
AbstractIn this paper we show the advantages of staged investments for venture capitalists. We develop an option-pricing model that enables to evaluate the flexibility acquired by a venture capitalist when he stages his investment process. Instead of investing a fixed amount at the beginning of the investment, the venture capitalist proceeds to a staged investment (one first investment and a second investment). The second investment will be triggered by a successful achievement of the first investment. Should the first investment be unsuccessful, the second investment will not be executed. Staging the investment in two phases enables the investor to reduce its uncertainty at the beginning of the project. As it will be demonstrated in the paper, the decision to proceed to the second investment can be modelled as a portfolio of a call option and a binary option.
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Bibliographic InfoPaper provided by International Center for Financial Asset Management and Engineering in its series FAME Research Paper Series with number rp85.
Date of creation: May 2003
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real options; staged investments; structured products; embedded options;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
- M13 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - New Firms; Startups
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-04-16 (All new papers)
- NEP-CFN-2005-04-16 (Corporate Finance)
- NEP-ENT-2005-04-16 (Entrepreneurship)
- NEP-FIN-2005-04-16 (Finance)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 101(4), pages 707-27, November.
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