Venture capital: Structure and incentives

Yoram Landskroner, Jacob Paroush

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

Venture capital is a major source of financing for firms in their early stages of development. Such businesses, especially in the high technology industries, are characterized by a high degree of uncertainty and asymmetry of information. In this paper we analyze the relationship between a venture capital organization ("capitalist") and the initial owner of an entrepreneurial entity in which it invests ("entrepreneur"). We focus on the agency problems and derive a compensation system. In our model the capitalist provides a combination of equity and debt financing while the owner provides equity financing which serves as a signal affecting the beliefs ("optimism") of the capitalist. The interesting result is that since the capitalist is assumed to be more risk averse than the entrepreneur, he is made to be more optimistic than the entrepreneur at the optimum.

Original languageEnglish
Pages (from-to)317-332
Number of pages16
JournalInternational Review of Economics and Finance
Volume4
Issue number4
DOIs
StatePublished - 1995

Bibliographical note

Funding Information:
We acknowledge the comments made by an anonymous referee. Yoram Landskroner would like to thank the Krueger Center for Finance for financial support.

Funding

We acknowledge the comments made by an anonymous referee. Yoram Landskroner would like to thank the Krueger Center for Finance for financial support.

FundersFunder number
Krueger Center for Finance

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