Financing and Advising: Optimal Financial Contracts with Venture Capitalists

Posted: 18 Dec 2003

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This paper analyses the joint provision of effort by an entrepreneur and by an advisor to improve the productivity of an investment project. Without moral hazard, it is optimal that both exert effort. With moral hazard, if the entrepreneur's effort is more efficient (less costly) than the advisor's effort, the latter is not hired if she does not provide funds. Outside financing arises endogenously. This explains why investors like venture capitalists are value enhancing. The level of outside financing determines whether common stocks or convertible bonds should be issued in response to incentives.

Suggested Citation

Casamatta, Catherine, Financing and Advising: Optimal Financial Contracts with Venture Capitalists. Available at SSRN:

Catherine Casamatta (Contact Author)

TSE-University of Toulouse 1 ( email )

Place Anatole-France
Toulouse Cedex, F-31042

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