When Equity Fails – An Appraisal of Revenue Sharing As the Last Resort

36 Pages Posted: 19 Jun 2019 Last revised: 12 Jun 2020

See all articles by Christian Haas

Christian Haas

FS - UNEP Collaborating Centre for Climate & Sustainable Energy Finance, Frankfurt School of Finance and Management

Thomas Heyden

PriceWaterhouseCoopers LLP - PricewaterhouseCoopers GmbH

Date Written: November 11, 2019

Abstract

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

Haas, Christian and Heyden, Thomas, When Equity Fails – An Appraisal of Revenue Sharing As the Last Resort (November 11, 2019). Available at SSRN: https://ssrn.com/abstract=3402623 or http://dx.doi.org/10.2139/ssrn.3402623

Christian Haas

FS - UNEP Collaborating Centre for Climate & Sustainable Energy Finance, Frankfurt School of Finance and Management ( email )

Adickesallee 32-34
Frankfurt, 60322
Germany

Thomas Heyden (Contact Author)

PriceWaterhouseCoopers LLP - PricewaterhouseCoopers GmbH ( email )

Wirtschaftsprüfungsgesellschaf
Friedrich-Ebert-Anlage 35-37
Frankfurt, D-60327
Germany

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