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Dealing with Venture Capitalists: Shopping Around or Exclusive Negotiation

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  • Carole HARITCHABALET
  • Catherine CASAMATTA

Abstract

We study the optimal negotiation strategy of an entrepreneur who faces two investors with private information about his project’s profitability. The entrepreneur derives a private benefit of control so that he cares not only about expected monetary profits, but also about the probability to obtain financing. If he contacts both venture capitalists simultaneously, the entrepreneur obtains high expected monetary profits. If he commits to a period of exclusive negotiation with one venture capitalist, he can increase the probability to obtain financing for riskier projects, but deal terms deteriorate. The optimal negotiation strategy results from this trade-off. We also solve for the equilibrium financial contracts and obtain implications for venture capitalists’ portfolios and entrepreneurs’ deals. The model predicts in particular that venture capitalists are more likely to finance projects with equity-like claims when projects are riskier and venture capitalists are more experienced. Also, high private benefit entrepreneurs are more likely to receive a single offer and to be financed by less experienced venture capitalists.

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  • Carole HARITCHABALET & Catherine CASAMATTA, 2013. "Dealing with Venture Capitalists: Shopping Around or Exclusive Negotiation," Working Papers 2013-2014_4, CATT - UPPA - Université de Pau et des Pays de l'Adour, revised Sep 2013.
  • Handle: RePEc:tac:wpaper:2013-2014_4
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    Cited by:

    1. Rin, Marco Da & Hellmann, Thomas & Puri, Manju, 2013. "A Survey of Venture Capital Research," Handbook of the Economics of Finance, Elsevier.
    2. repec:taf:oabmxx:v:3:y:2016:i:1:p:1138849 is not listed on IDEAS
    3. Simona Fabrizi & Steffen Lippert & Pehr-Johan Norbäck & Lars Persson, 2013. "Venture Capitalists and the Patenting of Innovations," Journal of Industrial Economics, Wiley Blackwell, vol. 61(3), pages 623-659, September.
    4. repec:eee:gamebe:v:109:y:2018:i:c:p:501-522 is not listed on IDEAS
    5. BELLEFLAMME, Paul & LAMBERT, Thomas & SCHWIENBACHER, Armin, 2011. "Crowdfunding: tapping the right crowd," CORE Discussion Papers 2011032, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

    More about this item

    Keywords

    Deal flow; Exclusive negotiation; Venture capital; Start-up financing; Informed investors;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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