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On the governance of start-ups

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  • Ambec, S.

Abstract

This paper examines an entrepreneur-investor relationship in a stylized model where (i) investment needs are unknown ex ante and arise sequentially (ii) a major decision must be reached at a maturity strage, (iii) this decision depends on entrepreneur's private information, observable by the investor at some cost. The two partners agree on a corporate governance system which includes a split of futre cash-flows and an allocation of control on the above decision contingently on investment. It turns out that control is assigned to the entrepreneur for low investment levels and then switches to the investor when investment exceeds a threshold. Classification-JEL: G24; G32; L22

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File URL: http://www.grenoble.inra.fr/Docs/pub/A2004/gael2004-06.pdf
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Bibliographic Info

Paper provided by Grenoble Applied Economics Laboratory (GAEL) in its series Working Papers with number 200406.

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Date of creation: 2004
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Handle: RePEc:gbl:wpaper:200406

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Keywords: CONTINGENT CONTROL; CORPORATE GOVERNANCE; VENTURE CAPITAL; BIOTECHNOLOGY;

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References

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  1. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Scholarly Articles 4554125, Harvard University Department of Economics.
  2. Aghion, Philippe & Bolton, Patrick, 1992. "An Incomplete Contracts Approach to Financial Contracting," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 473-94, July.
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  4. Tirole, Jean, 1999. "Corporate Governance," CEPR Discussion Papers 2086, C.E.P.R. Discussion Papers.
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  8. Repullo, R. & Suarez, J., 1998. "Venture Capital Finance: a Security Design Approach," Papers 9804, Centro de Estudios Monetarios Y Financieros-.
  9. Giacinta CESTONE, 2001. "Venture Capital Meets Contract Theory: Risky Claims or Formal Control?," UFAE and IAE Working Papers 480.01, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  10. Gompers, Paul & Lerner, Josh, 1996. "The Use of Covenants: An Empirical Analysis of Venture Partnership Agreements," Journal of Law and Economics, University of Chicago Press, vol. 39(2), pages 463-98, October.
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  12. Jean-Etienne de Bettignies, 2008. "Financing the Entrepreneurial Venture," Management Science, INFORMS, vol. 54(1), pages 151-166, January.
  13. Schmidt, Klaus M., 1999. "Convertible Securities and Venture Capital Finance," CEPR Discussion Papers 2317, C.E.P.R. Discussion Papers.
  14. Steven N. Kaplan & Per Stromberg, 2000. "Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts," NBER Working Papers 7660, National Bureau of Economic Research, Inc.
  15. Nöldeke, Georg & Schmidt, Klaus M., 1997. "Sequential Investments and Options to Own," CEPR Discussion Papers 1645, C.E.P.R. Discussion Papers.
  16. Andrei Shleifer & Robert W. Vishny, 1996. "A Survey of Corporate Governance," NBER Working Papers 5554, National Bureau of Economic Research, Inc.
  17. Andrei A. Kirilenko, 2001. "Valuation and Control in Venture Finance," Journal of Finance, American Finance Association, vol. 56(2), pages 565-587, 04.
  18. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
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