IDEAS home Printed from https://ideas.repec.org/p/por/fepwps/574.html
   My bibliography  Save this paper

Contingent Payment Mechanisms and Entrepreneurial Financing Decisions

Author

Listed:
  • Miguel de Oliveira Tavares Gärtner

    (CEF.UP and University of Porto, Portugal)

  • Paulo Jorge Pereira

    (CEF.UP and University of Porto, Portugal)

  • Elísio Brandão

    (University of Porto, Portugal)

Abstract

We discuss how Contingent Payment Mechanisms (also known as Contingent Earn-Outs) enable of Entrepreneurial Financing decisions. First, we introduce a taxonomy of contingent payment mechanisms, by combining features regarding their term and amount. Second, we introduce each of these alternative mechanisms on a previously developed real options framework for analyzing Entrepreneurial Financing decisions, in which one wealth constrained Entrepreneur is looking for an external equity provider – taken as a Venture Capitalist – to support a given growth strategy. We conclude that different contingent payment mechanisms are equivalent in obtaining joint support from Entrepreneurs and Venture Capitalists regarding optimum investment timing and, therefore, that the choice on the optimum mechanism to use depends on variables which are exogenous to the model, such as liquidity preferences or constraints, timing requirements, post-deal integration or overall deal terms.

Suggested Citation

  • Miguel de Oliveira Tavares Gärtner & Paulo Jorge Pereira & Elísio Brandão, 2016. "Contingent Payment Mechanisms and Entrepreneurial Financing Decisions," FEP Working Papers 574, Universidade do Porto, Faculdade de Economia do Porto.
    • Handle: RePEc:por:fepwps:574
    as

    Download full text from publisher

    File URL: http://www.fep.up.pt/investigacao/workingpapers/wp574.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    2. Stefano Caselli & Stefano Gatti & Marco Visconti, 2006. "Managing M&A Risk with Collars, Earn‐outs, and CVRs," Journal of Applied Corporate Finance, Morgan Stanley, vol. 18(4), pages 91-104, September.
    3. Croce, Annalisa & Martí, José & Murtinu, Samuele, 2013. "The impact of venture capital on the productivity growth of European entrepreneurial firms: ‘Screening’ or ‘value added’ effect?," Journal of Business Venturing, Elsevier, vol. 28(4), pages 489-510.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Castellaneta, Francesco & Conti, Raffaele & Veloso, Francisco M. & Kemeny, Carlos A., 2016. "The effect of trade secret legal protection on venture capital investments: Evidence from the inevitable disclosure doctrine," Journal of Business Venturing, Elsevier, vol. 31(5), pages 524-541.
    2. Oscar Gutiérrez & Francisco Ruiz-Aliseda, 2011. "Real options with unknown-date events," Annals of Finance, Springer, vol. 7(2), pages 171-198, May.
    3. Arve, Malin & Zwart, Gijsbert, 2023. "Optimal procurement and investment in new technologies under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 147(C).
    4. Marks, Phillipa & Marks, Brian, 2007. "Spectrum Allocation, Spectrum Commons and Public Goods: the Role of the Market," MPRA Paper 6785, University Library of Munich, Germany.
    5. Pierre‐Richard Agénor, 2004. "Macroeconomic Adjustment and the Poor: Analytical Issues and Cross‐Country Evidence," Journal of Economic Surveys, Wiley Blackwell, vol. 18(3), pages 351-408, July.
    6. Atal, Vidya & Bar, Talia & Gordon, Sidartha, 2016. "Project selection: Commitment and competition," Games and Economic Behavior, Elsevier, vol. 96(C), pages 30-48.
    7. Prelipcean, Gabriela & Boscoianu, Mircea, 2019. "Aspect Regarding the Design of Active Strategies for Venture Capital Financing – the Flexible Adjustment for Romania as a Frontier Capital Market," Proceedings of the ENTRENOVA - ENTerprise REsearch InNOVAtion Conference (2019), Rovinj, Croatia, in: Proceedings of the ENTRENOVA - ENTerprise REsearch InNOVAtion Conference, Rovinj, Croatia, 12-14 September 2019, pages 187-196, IRENET - Society for Advancing Innovation and Research in Economy, Zagreb.
    8. Waters, James, 2015. "Optimal design and consequences of financial disclosure regulation: a real options approach," MPRA Paper 63369, University Library of Munich, Germany.
    9. Golub, Alexander (Голуб, Александр), 2018. "Methodological Issues of Assessing Investment Risks in Projects Weakening the Dependence of the Russian Economy on Natural Resources and Providing a Transition to Low-Carbon Development [Методологи," Working Papers 071802, Russian Presidential Academy of National Economy and Public Administration.
    10. Magnus Schückes & Tobias Gutmann, 2021. "Why do startups pursue initial coin offerings (ICOs)? The role of economic drivers and social identity on funding choice," Small Business Economics, Springer, vol. 57(2), pages 1027-1052, August.
    11. Massimo Colombo & Annalisa Croce & Samuele Murtinu, 2014. "Ownership structure, horizontal agency costs and the performance of high-tech entrepreneurial firms," Small Business Economics, Springer, vol. 42(2), pages 265-282, February.
    12. Suleyman Basak & Georgy Chabakauri, 2012. "Dynamic Hedging in Incomplete Markets: A Simple Solution," The Review of Financial Studies, Society for Financial Studies, vol. 25(6), pages 1845-1896.
    13. Casper Agaton, 2017. "Coal, Renewable, or Nuclear? A Real Options Approach to Energy Investments in the Philippines," International Journal of Sustainable Energy and Environmental Research, Conscientia Beam, vol. 6(2), pages 50-62.
    14. Pringles, Rolando & Olsina, Fernando & Penizzotto, Franco, 2020. "Valuation of defer and relocation options in photovoltaic generation investments by a stochastic simulation-based method," Renewable Energy, Elsevier, vol. 151(C), pages 846-864.
    15. Jaewon Jung, 2023. "Multinational Firms and Economic Integration: The Role of Global Uncertainty," Sustainability, MDPI, vol. 15(3), pages 1-18, February.
    16. Alvarez, Luis H. R., 1998. "Exit strategies and price uncertainty: a Greenian approach," Journal of Mathematical Economics, Elsevier, vol. 29(1), pages 43-56, January.
    17. Arora, Ashish & Fosfuri, Andrea, 1999. "Exploring the internalization rationale for international investment: wholly owned subsidiary versus technology licensing in the worldwide chemical industry," DEE - Working Papers. Business Economics. WB 6430, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    18. Shunsuke Managi & Zheng Zhang & Shinya Horie, 2016. "A real options approach to environmental R&D project evaluation," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 18(3), pages 359-394, July.
    19. Chen Yu-Fu & Funke Michael, 2004. "Working Time and Employment Under Uncertainty," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 8(3), pages 1-23, September.
    20. Nick Bloom & Stephen Bond & John Van Reenen, 2007. "Uncertainty and Investment Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(2), pages 391-415.

    More about this item

    Keywords

    Venture Capital; Entrepreneurial Finance; Real Options; Growth Options; Entrepreneurship; Earn-Outs; Contingent Payments;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:por:fepwps:574. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/fepuppt.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.