The Staging of Venture Equity Capital and Venture Capitalist Bargaining Power

G. Geoffrey Booth, Orkunt M. Dalgic and Allan Young
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G. Geoffrey Booth: Michigan State University
Orkunt M. Dalgic: State University of New York at New Paltz
Allan Young: Curtin University, Perth, Western Australia & Whitman School of Management, Syracuse University

Journal of Entrepreneurial Finance, 2004, vol. 9, issue 3, 29-40

Abstract: In this paper we look at the effects of bargaining power on the types of entrepreneurial projects chosen by venture capitalists and show that a wealth-constrained venture capitalist prefers to provide equity financing to a two-stage rather than to a similar single-stage project. While the venture capitalist does not have bargaining power over the entrepreneur of a single-stage project and is thus unable to extract any surplus, the venture capitalist does have this advantage in a two-stage project and, provided the project is good, can demand a portion of the surplus as a pre-condition for providing follow-on capital. This suggests that venture capitalists should stage their capital investments in order to improve their bargaining power, allowing them to earn greater profits from successful entrepreneurial projects.

Keywords: Venture Capital; Equity (search for similar items in EconPapers)
JEL-codes: G24 G32 M13 (search for similar items in EconPapers)
Date: 2004
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