When Equity Fails – An Appraisal of Revenue Sharing As the Last Resort
36 Pages Posted: 19 Jun 2019 Last revised: 12 Jun 2020
Date Written: November 11, 2019
We study the trade-off venture capitalists encounter in a financing framework under moral hazard. The venture capitalist has the option to supply funds either within a revenue-sharing contract or via equity but faces a hidden effort problem. While projects with a low degree of moral hazard yield higher returns to the venture capitalist when financed by equity, revenue-sharing contracts become superior as moral hazard increases. At high moral hazard levels, revenue sharing becomes the sole financing option and hence can raise welfare. We apply our model in the context of initial coin offerings as a modern form of revenue sharing.
Keywords: Venture Capital, Revenue Sharing, Moral Hazard, ICO, Crypto Tokens
JEL Classification: D86, G24, G32
Suggested Citation: Suggested Citation