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

40 Pages Posted: 19 Jun 2019 Last revised: 9 Dec 2019

See all articles by Karsten Bocks

Karsten Bocks

Justus Liebig University Giessen

Christian Haas

Justus Liebig University Giessen - Department of Economics

Thomas Heyden

University of Giessen

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

Bocks, Karsten and 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

Karsten Bocks (Contact Author)

Justus Liebig University Giessen ( email )

Licher Str. 62
Giessen, 35394
Germany

HOME PAGE: http://https://www.uni-giessen.de/fbz/fb02/fb/professuren/bwl/bannier/team/Bocks%20Mitarbeiter

Christian Haas

Justus Liebig University Giessen - Department of Economics ( email )

Licher Str. 66
Gießen, 35394
Germany

Thomas Heyden

University of Giessen ( email )

Licher Str. 64
35394
Germany

HOME PAGE: http://www.uni-giessen.de/fbz/fb02/fb/professuren/bwl/bannier/team/heyden

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