Venture Capital Financing, Moral Hazard and Learning

D. Bergemann, U. Hege

Research output: Working paperDiscussion paperOther research output

336 Downloads (Pure)

Abstract

We consider the provision of venture capital in a dynamic agency model. The value of the venture project is initially uncertain and more information arrives by developing the project. The allocation of the funds and the learning process are subject to moral hazard. The optimal contract is a time-varying share contract which provides intertemporal risk-sharing between venture capitalist and entrepreneur. The share of the entrepreneur reflects the value of a real option. The option itself is based on the control of the funds. The dynamic agency costs may be high and lead to an ine¢cient early stopping of the project. A positive liquidation value explains the adoption of strip financing or convertible securities. Finally, relationship financing, including monitoring and the occasional replacement of the management improves the efficiency of the financial contracting.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages44
Volume1997-108
Publication statusPublished - 1997

Publication series

NameCentER Discussion Papers
Volume1997-108

Keywords

  • venture financing
  • optimal stopping
  • dynamic financial constraints
  • share contracts
  • security design

Fingerprint Dive into the research topics of 'Venture Capital Financing, Moral Hazard and Learning'. Together they form a unique fingerprint.

Cite this