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Financing Start-ups: Advising vs. Competing

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High-tech start-ups get external finance and guidance mostly from venture capitalists and/or business angels. We identify a simultaneous double moral hazard for the management style of entrepreneurs and the decision to advise the firm for financiers. We embed this relationship into the financial competition where strategic choices are equity shares, liquidation rights and quality of advising. We show that the financier holds all liquidation rights, that more competition weakly decreases the financier's equity share. Surprisingly, the response in advising quality is non-monotone. In a regime of soft competition, the financier owns the start-up and more competition weakens advising quality. In a regime of acute competition, more competition improves advising quality and lowers the financier's equity share in the start-up. Hence, advising and equity, are substitutes at the industry level once competition effects are taken into account.

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Bibliographic Info

Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 64.

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Date of creation: 01 Jul 2001
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Handle: RePEc:sef:csefwp:64

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Keywords: Start-ups; Contract Design; Equity; Oligopoly Competition;

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