Resolving Tensions between Heterogeneous Investors in a Startup

Forthcoming, Management Science

47 Pages Posted: 6 Apr 2019 Last revised: 8 Jan 2024

See all articles by Shiqi Chen

Shiqi Chen

Lancaster University - Lancaster University Management School

Bart M. Lambrecht

University of Cambridge - Judge Business School; Centre for Economic Policy Research (CEPR)

Date Written: November 28, 2023

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 pro-cyclical 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

JEL Classification: G32, G34, G35

Suggested Citation

Chen, Shiqi and Lambrecht, Bart, Resolving Tensions between Heterogeneous Investors in a Startup (November 28, 2023). Forthcoming, Management Science , Available at SSRN: https://ssrn.com/abstract=3351802 or http://dx.doi.org/10.2139/ssrn.3351802

Shiqi Chen

Lancaster University - Lancaster University Management School ( email )

Bailrigg
Lancaster, LA1 4YX
United Kingdom

Bart Lambrecht (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom
44-(0)-1223-339700 (Phone)
44-(0)-1223-339701 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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