Venture Capital Financing, Moral Hazard and Learning

D. Bergemann, U. Hege

Research output: Working paperDiscussion paperOther research output

176 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

Fingerprint

Venture capital financing
Moral hazard
Entrepreneurs
Financing
Financial contracting
Real options
Agency costs
Venture capital
Liquidation
Learning process
Time-varying
Monitoring
Venture
Agency model
Venture capitalists
Risk sharing
Convertible securities
Replacement
Optimal contract

Keywords

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

Cite this

Bergemann, D., & Hege, U. (1997). Venture Capital Financing, Moral Hazard and Learning. (CentER Discussion Papers; Vol. 1997-108). Tilburg: Finance.
Bergemann, D. ; Hege, U. / Venture Capital Financing, Moral Hazard and Learning. Tilburg : Finance, 1997. (CentER Discussion Papers).
@techreport{d70119dd1d854dde9d5916d92164d4c8,
title = "Venture Capital Financing, Moral Hazard and Learning",
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.",
keywords = "venture financing, optimal stopping, dynamic financial constraints, share contracts, security design",
author = "D. Bergemann and U. Hege",
note = "Pagination: 44",
year = "1997",
language = "English",
volume = "1997-108",
series = "CentER Discussion Papers",
publisher = "Finance",
type = "WorkingPaper",
institution = "Finance",

}

Bergemann, D & Hege, U 1997 'Venture Capital Financing, Moral Hazard and Learning' CentER Discussion Papers, vol. 1997-108, Finance, Tilburg.

Venture Capital Financing, Moral Hazard and Learning. / Bergemann, D.; Hege, U.

Tilburg : Finance, 1997. (CentER Discussion Papers; Vol. 1997-108).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - Venture Capital Financing, Moral Hazard and Learning

AU - Bergemann, D.

AU - Hege, U.

N1 - Pagination: 44

PY - 1997

Y1 - 1997

N2 - 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.

AB - 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.

KW - venture financing

KW - optimal stopping

KW - dynamic financial constraints

KW - share contracts

KW - security design

M3 - Discussion paper

VL - 1997-108

T3 - CentER Discussion Papers

BT - Venture Capital Financing, Moral Hazard and Learning

PB - Finance

CY - Tilburg

ER -

Bergemann D, Hege U. Venture Capital Financing, Moral Hazard and Learning. Tilburg: Finance. 1997. (CentER Discussion Papers).