Contingent Payment Mechanisms and Entrepreneurial Financing Decisions

Miguel de Oliveira Tavares Gärtner (), Paulo Jorge Pereira () and Elísio Brandão ()
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Miguel de Oliveira Tavares Gärtner: CEF.UP and University of Porto, Portugal
Paulo Jorge Pereira: CEF.UP and University of Porto, Portugal
Elísio Brandão: University of Porto, Portugal

FEP Working Papers from Universidade do Porto, Faculdade de Economia do Porto

Abstract: We discuss how Contingent Payment Mechanisms (also known as Contingent Earn-Outs) enable of Entrepreneurial Financing decisions. First, we introduce a taxonomy of contingent payment mechanisms, by combining features regarding their term and amount. Second, we introduce each of these alternative mechanisms on a previously developed real options framework for analyzing Entrepreneurial Financing decisions, in which one wealth constrained Entrepreneur is looking for an external equity provider – taken as a Venture Capitalist – to support a given growth strategy. We conclude that different contingent payment mechanisms are equivalent in obtaining joint support from Entrepreneurs and Venture Capitalists regarding optimum investment timing and, therefore, that the choice on the optimum mechanism to use depends on variables which are exogenous to the model, such as liquidity preferences or constraints, timing requirements, post-deal integration or overall deal terms.

Keywords: Venture Capital; Entrepreneurial Finance; Real Options; Growth Options; Entrepreneurship; Earn-Outs; Contingent Payments (search for similar items in EconPapers)
JEL-codes: G24 G31 G34 L26 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2016-03
New Economics Papers: this item is included in nep-cfn and nep-ent
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Persistent link: https://EconPapers.repec.org/RePEc:por:fepwps:574

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