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One for All: Resolving Tensions between Heterogeneous Investors in a Startup

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  • Lambrecht, Bart
  • Chen, Shiqi

Abstract

Legal scholars highlight the tensions that exist between different classes of shareholders in startups. We model a startup owned by undiversified investors with heterogeneous capital contributions and risk preferences. We show that a social planner acting on behalf of all shareholders can achieve the first-best expected life-time utility for all shareholders. The startup's optimal investment policy is pro-cyclical and a time-varying weighted average of shareholders' optimal investment policies. The optimal contracts issued to investors are tailor-made, interdependent, and include equity claims resembling preferred stock with heterogeneous payout caps, leading to a complex capitalization table as more investors join the startup.

Suggested Citation

  • Lambrecht, Bart & Chen, Shiqi, 2023. "One for All: Resolving Tensions between Heterogeneous Investors in a Startup," CEPR Discussion Papers 18227, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18227
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    More about this item

    Keywords

    investment;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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