Advice and Monitoring: Venture Financing with Multiple Tasks

Ibolya Schindele

No 29, SIFR Research Report Series from Institute for Financial Research

Abstract: This paper focuses on the conflicting dimensions of the involvement of venture capitalists as advisors and monitors in entrepreneurial projects. It argues that advising is congruent while monitoring dissonant with respect to entrepreneurial preferences. The analysis shows that despite the conflict of incentives between tasks, entrepreneurs with substantial capital needs prefer to contract with a multitask financier rather than with an advisor and a monitor separately. This provides one possible explanation for the existence of venture capital financing in the presence of both consulting firms and banks. The implications of the model coincide with observed features of venture capital firms and contracts: they predict the prevalent use of both equity and convertible securities together with control rights in venture capital contracting.

Keywords: Financial contracting; Venture capital; Multitask moral hazard (search for similar items in EconPapers)
JEL-codes: G24 G32 M13 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2004-09-15
New Economics Papers: this item is included in nep-cfn and nep-ent
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Citations: View citations in EconPapers (12)

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