Venture financing of start-ups: A model of contract between VC fund and entrepreneur

Ekonomski Anali

关键词: venture capital;    entrepreneur;    venture fund;    value added;    contract shares;    costly effort;    profit functions;   

DOI  :  10.2298/EKA1087061O

来源: DOAJ

【 摘 要 】

Venture capital has become one of the main sources of innovation in themodern, global economy. It is not just a substitute for bank loans: it hasproven to be a more efficient way of financing projects at different stages.On one hand, venture financing allows for projects with higher risk, whichleads to the possibility of higher returns on investment. On the other hand,venture investors who usually have managerial experience often participate ingoverning the business, which certainly adds value to the enterprise. In thispaper we establish the model of contract between the venture capital fund andthe entrepreneur, focusing on probably the most important issue of thiscontract: the shares of the parties in the business. The shares in thecompany determine the distribution of the joint surplus. The expected jointprofits are not just exogenously specified in the contract but are dependenton the behavioral variables of both parties at the stage of fulfilling thecontract. We call the behavioral variable of the entrepreneur ‘effort’ andthe one of the venture fund ‘advice’. The probability of the project’ssuccess, and hence the expected joint revenues, are increased by these two.However, both kinds of effort are costly to the respective parties that havemade them. Based on this fact we can elaborate the profit functions of bothsides of the contract. Our model can be considered as a basis for specifyingcontracts concerning venture financing. It can provide the logic for how theequilibrium shares of entrepreneur and venture fund are obtained.

【 授权许可】

Unknown