scholarly journals Venture Capital Contracting with Double-Sided Moral Hazard and Fairness Concerns

2018 ◽  
Vol 2018 ◽  
pp. 1-13 ◽  
Author(s):  
Jiajia Chang ◽  
Zhijun Hu
Keyword(s):  
Venture Capital ◽  
Moral Hazard ◽  
Maximization Problem ◽  
Venture Capitalist ◽  
Venture Capitalists ◽  
Constant Elasticity ◽  
Constant Elasticity Of Substitution ◽  
Effort Level ◽  
Fairness Concerns ◽  
Venture Enterprise

The development of new venture enterprise is the result of joint efforts of entrepreneurs and venture capitalists who collaborate based on complementary resources. In this paper, we analyze a venture capital incentive contracting model in which a venture capitalist interacts with an entrepreneur who is risk neutral and fairness concerned, offering him an equity contract. We solve the venture capitalist’s maximization problem in the presence of double-sided moral hazard. Our results show that fairness concerns change the structure of the optimal contract. More importantly, we show that the solution to the contract regarding the optimal share given to the entrepreneur is nonlinear and is a fixed point between 0 and 1. Further, we simulate the model under the assumption that venture project’s revenue is a Constant Elasticity of Substitution (CES) function and obtain the following results. (1) When the two efforts are complementary, the venture capitalist’s effort does not monotonically decrease in the share allocated to the entrepreneur, while the entrepreneur’s effort does not monotonically increase in his share. (2) Relative to the benchmark case where the entrepreneur is fairness neutral, the optimal equity share allocated to the fair-minded entrepreneur is larger than 1/2, and as the degree of efforts complementarity increases, the optimal equity share tends to 60%. In this scenario, for a given efforts substitution parameter, the fair-minded entrepreneur provides a higher effort level than the venture capitalist.

Peer Monitoring, Syndication, and the Dynamics of Venture Capital Interactions: Theory and Evidence

2019 ◽  
Vol 55 (6) ◽  
pp. 1875-1914 ◽  
Author(s):  
Onur Bayar ◽  
Thomas J. Chemmanur ◽  
Xuan Tian
Keyword(s):  
Theoretical Model ◽  
Venture Capital ◽  
Moral Hazard ◽  
Empirical Analysis ◽  
Venture Capitalist ◽  
Value Addition ◽  
Peer Monitoring ◽  
Moral Hazard Problem ◽  
Model Predictions

We develop a theoretical model providing a new rationale for venture capitalist (VC) syndicate formation and empirically test our model predictions. An entrepreneur obtains financing and two different value-adding inputs from a single VC or from two different VCs, each operating in his area of expertise. We characterize the entrepreneur’s equilibrium choice between contracting with a single VC, individually with multiple VCs, or with a VC syndicate. We show that syndicates mitigate VCs’ moral hazard problem in value addition. We also analyze the dynamics of VC syndicate composition. The results of our empirical analysis are consistent with our model’s predictions.

Venture investment under multi-stage incentive model based on fairness concerns

Kybernetes ◽  
2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Yadong Shu ◽  
Ying Dai ◽  
Zujun Ma ◽  
Zhijun Hu
Keyword(s):  
Venture Capital ◽  
Two Stage ◽  
Content Type ◽  
Effort Level ◽  
Asymmetrical Information ◽  
Second Stage ◽  
Venture Investment ◽  
Multi Stage ◽  
Fairness Concerns ◽  
The Impact

PurposeThis study explores the impact of EN's (venture entrepreneurs, simplified as EN) jealousy fairness concerns coefficient on two-stage venture capital decision-making in cases of symmetrical and asymmetrical information. It discusses the equilibrium solution of two-stage venture.Design/methodology/approachThe principal-agent model was established based on multiple periods, and differentiated contracts were established at different stages. The validity of the models and the contract was verified by numerical simulation.FindingsThe results suggest that with the increase in the EN fairness concerns coefficient, the effort level of EN decreases continuously and decreases faster in the second stage because this is the last stage. The level of VC's (venture capitalist, simplified as VC) effort declines first and then increases; that is, VC will increase the effort level when the fairness concerns coefficient increases to a certain threshold. To motivate EN to pay more effort, VC will increase the incentive to EN in the first stage. However, it will reduce the level of incentive to EN in the second stage. In the limited stage of venture investment, consider that the fairness concerns of EN do not make the profits of EN and VC achieve Pareto improvement simultaneously.Originality/valueFirst, the authors implanted fairness concerns into multi-stage venture capital and discussed the impact of fairness concerns on the efforts and returns of both parties. Second, among the influencing factors of the project output, the authors consider the bilateral efforts of EN and VC, the working capacity of EN, the initial investment scale, and the external uncertain environment.

scholarly journals The Cobb-Douglas function for a continuum model

2017 ◽  
Vol 36 (70) ◽  
pp. 1-18 ◽  
Author(s):  
Javier Humberto Ospina Holguín
Keyword(s):  
Continuum Model ◽  
Returns To Scale ◽  
Profit Maximization ◽  
Functional Derivative ◽  
Maximization Problem ◽  
Constant Elasticity ◽  
Constant Elasticity Of Substitution ◽  
Competitive Firm ◽  
The One ◽  
Constant Returns To Scale

This paper introduces two formal equivalent definitions of the Cobb-Douglas function for a continuum model based on a generalization of the Constant Elasticity of Substitution (CES) function for a continuum under not necessarily constant returns to scale and based on principles of product calculus. New properties are developed, and to illustrate the potential of using the product integral and its functional derivative, it is shown how the profit maximization problem of a single competitive firm using a continuum of factors of production can be solved in a manner that is completely analogous to the one used in the discrete case.

What Every Biotech Entrepreneur Needs to Know about VC Due Diligence

2012 ◽  
Vol 18 (2) ◽  
Author(s):  
Stephen M Sammut
Keyword(s):  
Venture Capital ◽  
Business Plan ◽  
Case Law ◽  
Venture Capitalist ◽  
Venture Capitalists ◽  
Due Diligence ◽  
Special Edition ◽  
Venture Capital Firm ◽  
Good Opportunity ◽  
Business Plans

Due diligence, as it applies to venture capital, is actually imprecise. Origins of the term are based in banking case law. Due diligence to the attorney is more of a precise concept. A better term is “homework.” Better indeed, because the burden of this homework weighs far more heavily on the entrepreneur than on the venture capitalist. The odds of getting funded by a venture capital firm are somewhere between 50: and 100: 1. In most instances, the funding goes to companies that already have some connection into the community of venture capital funds. Does this mean that all others need not apply? That is hardly the case. Good venture capitalists know a good opportunity when they see it, but sometimes it is not always obvious. Either the business plan is flawed in strategy, format or content, or the due diligence process reveals a team totally unprepared to fulfill their own vision. Elsewhere in this special edition of JCB is an article on the business plan and the pitch book. This article teaches, in a manner of speaking, how business plans get read and pitches gets heard.

scholarly journals Replacing Management or Not: Contract Renegotiation to Prevent Double Moral Hazards of Venture Capital Investments

2021 ◽  
Vol 2021 ◽  
pp. 1-10
Author(s):  
Linsen Yin ◽  
Ane Pan
Keyword(s):  
Venture Capital ◽  
Strategic Behavior ◽  
Status Quo ◽  
Work Team ◽  
Venture Capitalist ◽  
Private Benefits ◽  
The Status ◽  
Venture Enterprise ◽  
Behavior Choice ◽  
Management Work

During the venture capital development, replacing the management work team or keeping up the status quo is a key strategy choice for venture capitalist and venture entrepreneur about the long-term development of enterprise and the control right transferring. In fact, the contract designing focuses on the distribution of cash flow to encourage both efforts in order to avoid double moral hazard, and the strategy behavior has similar effects according to the developing condition of venture enterprise. In this paper, we consider both contract design and strategic behavior, regarding this strategic behavior choice as a motivator and combining strategic behavior with financial instrument options. The main innovation is to redesign and optimize the contract based on dynamic perspective, which will analyze initial contract designed to motivate both sides’ effort if a venture enterprise is in good state, and then renegotiate whether to replace the management work team or keep up the status quo according to the venture enterprise’s development state in the process of venture investment cooperation. The paper also puts forward some conclusions: joint effort of both sides can be motivated through strategic behavior choice and then lead to increasing the overall value of the venture enterprise; after the venture enterprise has gained private benefits in the early stage, the venture capitalist needs to make appropriate assignments and demisability in benefits to remotivate the venture enterprise’s efforts, aiming to further balance venture enterprise’s private benefits and the earnings redistributed by venture capitalist.

scholarly journals Model for Design of Portfolio Venture Investment Contract When Taking Moral Hazards into Account

2020 ◽  
Vol 2020 ◽  
pp. 1-6
Author(s):  
L. Yin ◽  
Y. Liu ◽  
Z. Wang
Keyword(s):  
Venture Capital ◽  
Moral Hazard ◽  
Marginal Cost ◽  
Venture Capitalist ◽  
Portfolio Investment ◽  
Marginal Benefit ◽  
Moral Hazards ◽  
Hazard Reduction ◽  
Venture Investment ◽  
High Level

Portfolio investment is adopted by the venture capital to diversify those risks involved in project selection, investing or operating so that the venture capitalist can expect a relatively stable income and lower financing risks. Based on the design of portfolio investment contract with unlimited funds developed by Kanniainen and Keuschnigg, and Inderst et al., this article makes a modification and presents a model given the limitation of funds available for the venture capitalist. It is demonstrated that the marginal benefit of efforts paid by the entrepreneurs exceeds the marginal cost, given the limitation of funds available, which will conduce to a high-level engagement of the entrepreneurs. Thus, by adopting the design of renegotiation contract, the venture capitalist can manage to stimulate the entrepreneurs to make efforts, which is to result in moral hazard reduction.

scholarly journals CURRENT TRENDS IN THE DEVELOPMENT OF VENTURE ENTERPRISE IN UKRAINE

2021 ◽  
Author(s):  
Antonina Lahun
Keyword(s):  
Venture Capital ◽  
Asset Management ◽  
Capital Investment ◽  
Structural Parameters ◽  
Venture Capitalists ◽  
Investment Funds ◽  
Venture Capital Investment ◽  
Closed End Funds ◽  
Venture Enterprise ◽  
Venture Business

The article is devoted to the analysis of quantitative and structural parameters of venture business development in Ukraine, so it seems appropriate to focus on its most generalizing features and characteristics, which have been clearly outlined in recent decades. First of all, it should be noted the extremely low level of capitalization of the domestic venture capital market. Also important for a comprehensive analysis of the current state and trends in domestic venture entrepreneurship is the number of venture capital investment institutions and a significant increase in the level of concentration of the domestic asset management market. Another conclusion that follows from the data concerns the dominance of venture mutual investment funds, ie closed-end funds, in the subjective structure of domestic venture entrepreneurship. Domestic venture funds are also characterized by an extremely insignificant share of the value of their assets in the gross domestic product of our state. Another well-established trend in the structural dynamics of domestic venture funds in the last decade is the growing share of foreign capital in the structure of their investment flows. In addition, in recent years there has been a clear eloquent trend, namely: the growing share of domestic individuals in the subjective structure of investors in venture mutual investment institutions. International corporate structures, business incubators and accelerators are actively opening their innovative divisions and representative offices in our country. It is worth noting that the number and volume of funding for Ukrainian startups is increasing from year to year. In recent years, the processes of attracting funding through crowdfunding platforms and grant sources have been developing dynamically. Evidence of the growing interest of foreign venture capitalists in Ukrainian startups is the intensification of mergers and acquisitions in this area. Unfortunately, maintaining the extremely low economic motivation of venture capitalists to invest money in the early stages of research and self-search by inventors in most cases leads to dependence on investors and unequal exchange of property rights for scientific ideas for financial resources.

Can Venture Capital Be a Curse?

2010 ◽  
Vol 10 (1) ◽  
Author(s):  
George Kanatas ◽  
Christodoulos Stefanadis
Keyword(s):  
Social Welfare ◽  
Venture Capital ◽  
Venture Capitalist ◽  
Venture Capitalists ◽  
Ipo Underpricing ◽  
Capital Services

Abstract We show that partnering with venture capitalists may be a curse to entrepreneurs in that it reduces their profits in the commercialization phase. Agents rationally infer that a likely reason an entrepreneur who has received managerial assistance (from a venture capitalist) refrains from a lucrative IPO and instead opts for an acquisition may be the low quality of his technology (which is unfixable), rather than of his management (which may be fixable). This leads to lower acquisition prices and greater IPO underpricing. From a social welfare standpoint, venture capital services are under-utilized and technologies are under-commercialized.

Collaboration Among Silicon Valley Venture Capitalists

2019 ◽  
pp. 200-219
Author(s):  
Lyda Bigelow ◽  
Jennifer Kuan ◽  
Kyle Mayer
Keyword(s):  
Venture Capital ◽  
Regulatory Focus ◽  
Regional Differences ◽  
Silicon Valley ◽  
Psychological Effects ◽  
Venture Capitalists ◽  
Regulatory Focus Theory ◽  
Industry Clusters ◽  
Entrepreneurial Ventures ◽  
Point Of Entry

Regional differences among industry clusters have long been a puzzle, especially when performance differences are significant. This chapter examines the case of venture capital investing, in which Silicon Valley differs from the rest of the world despite attempts to imitate its model. The point of entry in this chapter is the contract between venture capitalist and entrepreneur. Although such contracts have been analyzed in other research, this chapter argues that the psychological effects of different contract styles are of primary importance to innovative outcomes of entrepreneurial ventures. Thus, it argues that regulatory focus theory, which considers the psychological effects of contracting, is essential to understanding differences in practice and outcomes in venture capital clusters.

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