Staging of Venture Financing, Investor Opportunism and Patent Law

Jochen Bigus

Journal of Business Finance & Accounting, 2006, vol. 33, issue 7‐8, 939-960

Abstract: Abstract: Stage financing provides a real option that is valuable when facing external uncertainty. However, it may also induce investor hold‐up, if the property rights on an invention are not sufficiently protected. As a consequence, the entrepreneur may not work hard. Investor opportunism is less likely to occur, if investors' residual cash‐flow‐rights are contingent on verifiable ‘milestones’ in the previous stage. Equity‐linked financing also provides high‐powered incentives to the investor not to ‘steal the idea’ because his payoff becomes sensitive to the project value. The paper provides a new explanation for both types of contractual provisions.

Date: 2006
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