Distributing Start‐Up Equity: A Theoretical Foundation for an Emerging Practice

Meyyappan Narayanan and Moren Lévesque

Journal of Small Business Management, 2019, vol. 57, issue 3, 1066-1085

Abstract: We use agency theory to model equity division in venture capital financing with three complementary value‐creation factors—the entrepreneur's effort, the venture capitalist's advising/monitoring service, and the investment amount. While considering that investors often base their funding decisions on gut feeling, even as they employ rational decision‐making processes, we derive closed‐form expressions for optimal ownership sharing. Our findings provide theoretical explanation to support the recent call for practitioners to allocate ownership equity based on the relative potential contributions of the entrepreneur and the venture capitalist to generate value for the new investment prospect.

Date: 2019
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/10.1111/jsbm.12420 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:ujbmxx:v:57:y:2019:i:3:p:1066-1085

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/ujbm20

DOI: 10.1111/jsbm.12420

Access Statistics for this article

Journal of Small Business Management is currently edited by Eric Liguori

More articles in Journal of Small Business Management from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().