Resolving Tensions Between Heterogeneous Investors in a Startup

Shiqi Chen () and Bart M. Lambrecht ()
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Shiqi Chen: Department of Accounting and Finance, Lancaster University Management School, Lancaster LA1 4YX, United Kingdom
Bart M. Lambrecht: Judge Business School, University of Cambridge, Cambridge CB2 1AG, United Kingdom; and Centre for Economic Policy Research, London EC1V 0DX, United Kingdom

Management Science, 2025, vol. 71, issue 3, 2678-2695

Abstract: Legal scholars highlight the tensions that exist between different classes of shareholders in startups. We model a startup owned by undiversified investors with heterogeneous capital contributions and risk preferences. A social planner runs the firm on behalf of all investors. We compare investors’ expected utility with a hypothetical first-best decentralized benchmark. The startup’s optimal investment policy is procyclical and a time-varying weighted average of shareholders’ optimal investment policies. The optimal contracts issued to investors are tailor-made, interdependent, and include equity claims resembling preferred stock with heterogeneous payout caps, leading to a complex capitalization table as more investors join the startup.

Keywords: investment; payout; startup; risk preferences; group policy (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:71:y:2025:i:3:p:2678-2695

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