Financing Start-ups: Advising vs. Competing

Nicolas Boccard ()

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: High-tech start-ups get external finance and guidance mostly from venture capitalists and/or business angels. We identify a simultaneous double moral hazard for the management style of entrepreneurs and the decision to advise the firm for financiers. We embed this relationship into the financial competition where strategic choices are equity shares, liquidation rights and quality of advising. We show that the financier holds all liquidation rights, that more competition weakly decreases the financier's equity share. Surprisingly, the response in advising quality is non-monotone. In a regime of soft competition, the financier owns the start-up and more competition weakens advising quality. In a regime of acute competition, more competition improves advising quality and lowers the financier's equity share in the start-up. Hence, advising and equity, are substitutes at the industry level once competition effects are taken into account.

Keywords: Start-ups; Contract Design; Equity; Oligopoly Competition (search for similar items in EconPapers)
JEL-codes: D4 G3 L1 L2 (search for similar items in EconPapers)
Date: 2001-07-01
New Economics Papers: this item is included in nep-ent and nep-mfd
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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:64

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