IDEAS home Printed from https://ideas.repec.org/a/gam/jrisks/v13y2025i2p22-d1578435.html
   My bibliography  Save this article

A Different Risk–Return Relationship

Author

Listed:
  • Aydin Selim Oksoy

    (Department of Management, Marketing & Entrepreneurship, Barney School of Business, University of Hartford, West Hartford, CT 06117, USA)

  • Matthew R. Farrell

    (Department of Management & Marketing, College of Business, Austin Peay State University, Clarksville, TN 37044, USA)

  • Shaomin Li

    (Department of Management, Strome College of Business, Old Dominion University, Norfolk, VA 23529, USA)

Abstract

We challenge the widely accepted premise that the valuation of an early-stage firm is simply the capital invested (USD) divided by the equity received (%). Instead, we argue that this calculation determines the break-even point for the investor; for example, investing USD 1.0 in exchange for a 10% equity sets a firm-level free cash flow target of USD 10.0, resulting in a 0% return for the investor. The design of our study is that of a descriptive analysis of the phenomenon, based on three assumptions: that angel investing is a two-issue negotiation, that negotiation positions are communicated sequentially from capital to equity, and that the capital is fixed to a strategic trajectory. We note that when pausing the negotiation once a strategic trajectory (and thus capital) has been defined, utilizing the break-even point as the main reference point provides a structure that can serve as a guiding barometer for negotiators, as they evaluate their options across the full range of equity greater than 0% and less than 100%. We draw attention to the diminishing benefit of the marginal equity percentage point [diminishing at a rate of (−1/x 2 )] for the investor to break even on their investment. This relationship tracks to the equation [value = 1/equity], which presents the full option set for any offer, once the capital is determined. Our study provides the practitioner with the subtle benefit of situational awareness and the scholar with a logical foundation for future research.

Suggested Citation

  • Aydin Selim Oksoy & Matthew R. Farrell & Shaomin Li, 2025. "A Different Risk–Return Relationship," Risks, MDPI, vol. 13(2), pages 1-27, January.
    • Handle: RePEc:gam:jrisks:v:13:y:2025:i:2:p:22-:d:1578435
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2227-9091/13/2/22/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2227-9091/13/2/22/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Dahlman, Carl J, 1979. "The Problem of Externality," Journal of Law and Economics, University of Chicago Press, vol. 22(1), pages 141-162, April.
    2. Hellmann, Thomas & Schure, Paul & Vo, Dan H., 2021. "Angels and venture capitalists: Substitutes or complements?," Journal of Financial Economics, Elsevier, vol. 141(2), pages 454-478.
    3. Bonini, Stefano & Capizzi, Vincenzo & Valletta, Mario & Zocchi, Paola, 2018. "Angel network affiliation and business angels' investment practices," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 592-608.
    4. Sidney G. Winter, 2000. "The Satisficing Principle in Capability Learning," Strategic Management Journal, Wiley Blackwell, vol. 21(10‐11), pages 981-996, October.
    5. Herbert A. Simon, 1955. "A Behavioral Model of Rational Choice," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 69(1), pages 99-118.
    6. Greg Fisher & Emily Neubert, 2023. "Evaluating Ventures Fast and Slow: Sensemaking, Intuition, and Deliberation in Entrepreneurial Resource Provision Decisions," Entrepreneurship Theory and Practice, , vol. 47(4), pages 1298-1326, July.
    7. Thomas Hellmann, 1998. "The Allocation of Control Rights in Venture Capital Contracts," RAND Journal of Economics, The RAND Corporation, vol. 29(1), pages 57-76, Spring.
    8. Paul Davidson, 1996. "Reality and Economic Theory," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 18(4), pages 479-508, July.
    9. Fama, Eugene F, 1980. "Agency Problems and the Theory of the Firm," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 288-307, April.
    10. Kristensen, Henrik & Garling, Tommy, 1997. "The Effects of Anchor Points and Reference Points on Negotiation Process and Outcome," Organizational Behavior and Human Decision Processes, Elsevier, vol. 71(1), pages 85-94, July.
    11. John Freear & Jeffrey E. Sohl & William Wetzel, 2002. "Angles on angels: Financing technology-based ventures - a historical perspective," Venture Capital, Taylor & Francis Journals, vol. 4(4), pages 275-287, October.
    12. Mannix, Elizabeth A. & Tinsley, Catherine H. & Bazerman, Max, 1995. "Negotiating over Time: Impediments to Integrative Solutions," Organizational Behavior and Human Decision Processes, Elsevier, vol. 62(3), pages 241-251, June.
    13. Baylee Smith & Angelino Viceisza, 2018. "Bite me! ABC’s Shark Tank as a path to entrepreneurship," Small Business Economics, Springer, vol. 50(3), pages 463-479, March.
    14. Prowse, Stephen, 1998. "Angel investors and the market for angel investments," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 785-792, August.
    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. Berger, Marius & Gottschalk, Sandra, 2025. "Amplifying angels: Evidence from the INVEST program," Journal of Business Venturing, Elsevier, vol. 40(1).
    2. Ichev, Riste & Valentinčič, Aljoša, 2025. "The effect of impact investing on performance of private firms," Research in International Business and Finance, Elsevier, vol. 73(PA).
    3. Matthias Kiefer & Edward Jones & Andrew Adams, 2016. "Principals, Agents and Incomplete Contracts: Are Surrender of Control and Renegotiation the Solution?," CFI Discussion Papers 1603, Centre for Finance and Investment, Heriot Watt University.
    4. Andres Ruiz Serrano & Andrea Musumeci & Juan Julie Li & Mauricio Ruiz Serrano & Carolina Serrano Barquin, 2025. "Rationality and the exploitation of natural resources: a psychobiological conceptual model for sustainability," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 27(6), pages 13167-13189, June.
    5. Eliasson, Gunnar, 2005. "The nature of economic change and management in a new knowledge based information economy," Information Economics and Policy, Elsevier, vol. 17(4), pages 428-456, October.
    6. Pope, Robin & Selten, Reinhard & Kube, Sebastian, 2009. "Nominalist Heuristics and Economic Theory," Bonn Econ Discussion Papers 17/2009, University of Bonn, Bonn Graduate School of Economics (BGSE).
    7. Gilberto Tadeu Lima & Mark Setterfield & Jaylson Jair da Silveira, 2014. "Inflation Targeting and Macroeconomic Stability with Heterogeneous Inflation Expectations," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 37(2), pages 255-279, December.
    8. Johannes Wallmeroth & Peter Wirtz & Alexander Peter Groh, 2017. "Institutional Seed Financing, Angel Financing, and Crowdfunding of Entrepreneurial Ventures: A Literature Review," Working Papers hal-01527999, HAL.
    9. Dan Johansson, 2010. "The theory of the experimentally organized economy and competence blocs: an introduction," Journal of Evolutionary Economics, Springer, vol. 20(2), pages 185-201, April.
    10. von Hagen, Jürgen & Kube, Sebastian & Kaiser, Johannes & Selten, Reinhard & Pope, Robin, 2006. "Prominent Numbers and Ratios in Exchange Rate Determination: Field and Laboratory Evidence," Bonn Econ Discussion Papers 29/2006, University of Bonn, Bonn Graduate School of Economics (BGSE).
    11. Giovanni. Gavetti & Daniel A. Levinthal, 2004. "50th Anniversay Article: The Strategy Field from the Perspective of Management Science: Divergent Strands and Possible Integration," Management Science, INFORMS, vol. 50(10), pages 1309-1318, October.
    12. Christos Pitelis, 2013. "Towards a More ‘Ethically Correct’ Governance for Economic Sustainability," Journal of Business Ethics, Springer, vol. 118(3), pages 655-665, December.
    13. Argandoña, Antonio, 2010. "From action theory to the theory of the firm," IESE Research Papers D/855, IESE Business School.
    14. Stephan Billinger & Kannan Srikanth & Nils Stieglitz & Terry R. Schumacher, 2021. "Exploration and exploitation in complex search tasks: How feedback influences whether and where human agents search," Strategic Management Journal, Wiley Blackwell, vol. 42(2), pages 361-385, February.
    15. Yasmin Olteanu, 2018. "Theoretical Concepts," Palgrave Studies in Impact Finance, in: Access to Justice in Microfinance, chapter 0, pages 9-53, Palgrave Macmillan.
    16. Ha-Joon Chang & Ali Cheema & L. Mises, 2002. "Conditions For Successful Technology Policy In Developing Countries—Learning Rents, State Structures, And Institutions," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 11(4-5), pages 369-398.
    17. Bonnet, Christophe & Capizzi, Vincenzo & Cohen, Laurence & Petit, Aurelien & Wirtz, Peter, 2022. "What drives the active involvement in business angel groups? The role of angels' decision-making style, investment-specific human capital and motivations," Journal of Corporate Finance, Elsevier, vol. 77(C).
    18. Daniele Tavani & Luke Petach, 2021. "Firm beliefs and long-run demand effects in a labor-constrained model of growth and distribution," Journal of Evolutionary Economics, Springer, vol. 31(2), pages 353-377, April.
    19. Berger, Marius & Gottschalk, Sandra, 2021. "Financing and advising early stage startups: The effect of angel investor subsidies," ZEW Discussion Papers 21-069, ZEW - Leibniz Centre for European Economic Research.
    20. P.P.M.A.R. Heugens, 2004. "A Neo-Weberian Theory of the Firm," Working Papers 04-02, Utrecht School of Economics.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;

    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:gam:jrisks:v:13:y:2025:i:2:p:22-:d:1578435. 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: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    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.