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Staging of Venture Financing, Moral Hazard, and Patent Law


  • Jochen Bigus

    (University of Hamburg)


The literature on venture financing mainly focuses on entrepreneurial moral hazard. The investor, however, may behave opportunistically, too. We look at the case where the investor demands a higher share on the venture’s return before financing the next stage. Possibly, the staging of capital is the most salient feature of venture financing. The entrepreneur may be forced to accept the investor’s offer, when she is supposed to lose something by changing the investor. For instance, if the property rights on the invention are not sufficiently protected - because the entrepreneur has not filed for a patent or the invention does not meet the legal requirements for patent protection - the investor may use the idea for his own purposes once the entrepreneur terminates the relationship. This threat may force the entrepreneur to continue although the investor demands a higher share. As a consequence, she sticks with the investor, however, she may not choose the efficient level of specific investments, rather she underinvests. The impact of patent law is important. In the law and economics literature patent law is primarily seen as an instrument balancing the trade-off between setting incentives to innovate and limiting monopoly power of patent holders. It, however, overlooks the fact that an entrepreneur’s idea often only develops to a market product with the help of investors providing financial resources. Thus, I argue that there is an additional goal of patent law: mitigating conflicts in the venture financing process thereby making innovations more likely.

Suggested Citation

  • Jochen Bigus, "undated". "Staging of Venture Financing, Moral Hazard, and Patent Law," German Working Papers in Law and Economics 2002-1-1044, Berkeley Electronic Press.
  • Handle: RePEc:bep:dewple:2002-1-1044 Note: oai:bepress:

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    References listed on IDEAS

    1. Klaus M. Schmidt, 2003. "Convertible Securities and Venture Capital Finance," Journal of Finance, American Finance Association, vol. 58(3), pages 1139-1166, June.
    2. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
    3. Stanley M. Besen & Leo J. Raskind, 1991. "An Introduction to the Law and Economics of Intellectual Property," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 3-27, Winter.
    4. Williamson, Oliver E, 1983. "Credible Commitments: Using Hostages to Support Exchange," American Economic Review, American Economic Association, vol. 73(4), pages 519-540, September.
    5. Oliver Hart & John Moore, 1994. "A Theory of Debt Based on the Inalienability of Human Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 841-879.
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    Cited by:

    1. Carsten Bienz & Julia Hirsch, 2011. "The Dynamics of Venture Capital Contracts," Review of Finance, European Finance Association, vol. 16(1), pages 157-195.
    2. Bienz, Carsten & Hirsch, Julia, 2005. "The dynamics of venture capital contracts," LSE Research Online Documents on Economics 24670, London School of Economics and Political Science, LSE Library.

    More about this item


    venture capital; stage financing; moral hazard by investor; patent law;

    JEL classification:

    • G - Financial Economics
    • K - Law and Economics
    • G - Financial Economics
    • G - Financial Economics


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