A multi-period game theoretic model of venture capitalists and entrepreneurs

Venture Capital Performance: the Disparity Between Europe and the United States

“…An important alternative hypothesis is proposed by Gilson and Schizer (2002) who attribute the frequent use of convertibles in the United States to tax considerations. Elitzur and Gavious (2003) and Bergemann and Hege (2003) suggest that stage …nancing reduces the entrepreneur's information rent, and allows to increase entrepreneurial e¤ort and alleviate …nancial constraints. Cuny and Talmor (2005) compare traditional round …nancing with milestone …nancing, where VCs commit to the …nancial terms of multiple funding stages conditional on achieving certain benchmarks.…”

Banks Versus Venture Capital in the Financing of New Ventures

“…The activities performed by the entrepreneur and the investor typically are difficult to verify, leading to what is known as a double-sided moral hazard problem. In this section we present a simplified version of Bettignies and Brander (2007), which can be used to examine the trade-off between VC financing and bank financing in the context of single-sided, that is, entrepreneur only, moral hazard as in Elitzur and Gavious (2003), as well as in the context of double-sided moral hazard. 3 Consider a wealth-constrained entrepreneur who wants to start a new venture.…”

“…In that case, the investor has zero marginal productivity and exerts zero effort at date 1, regardless of the type of financing. Indeed the problem reduces to a single-sided moral hazard model not dissimilar to Elitzur and Gavious (2003).…”

“…Thus, when the investor brings nothing but cash to the venture, it is optimal for the entrepreneur to choose bank financing, because the associated debt contract "backloads all incentive payments to the entrepreneur" as suggested by Elitzur and Gavious (2003).…”

“…The simplest possible framework is a single-sided moral hazard model in the spirit of Elitzur and Gavious (2003), where only the entrepreneur exerts nonverifiable effort. In such a framework, the optimal contract is to "backload all incentive payments to the entrepreneur," very similar, in fact, to simple debt contracts such as the ones offered by banks.…”