Venture Capital Contracting and Syndication: An Experiment in Computational Corporate Finance

57 Pages Posted: 20 Nov 2005 Last revised: 24 Apr 2006

See all articles by Zsuzsanna Fluck

Zsuzsanna Fluck

Michigan State University - Department of Finance

Kedran Rae Garrison

Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA)

Stewart C. Myers

Massachusetts Institute of Technology (MIT); National Bureau of Economic Research (NBER)

Date Written: September 2005

Abstract

This paper develops a model to study how entrepreneurs and venture-capital investors deal with moral hazard, effort provision, asymmetric information and hold-up problems. We explore several financing scenarios, including first-best, monopolistic, syndicated and fully competitive financing. We solve numerically for the entrepreneur's effort, the terms of financing, the venture capitalist's investment decision and NPV. We find significant value losses due to holdup problems and under-provision of effort that can outweigh the benefits of staged financing and investment. We show that a commitment to later-stage syndicate financing increases effort and NPV and preserves the option value of staged investment. This commitment benefits initial venture capital investors as well as the entrepreneur.

Suggested Citation

Fluck, Zsuzsanna and Garrison, Kedran Rae and Myers, Stewart C., Venture Capital Contracting and Syndication: An Experiment in Computational Corporate Finance (September 2005). NBER Working Paper No. w11624. Available at SSRN: https://ssrn.com/abstract=807613

Zsuzsanna Fluck

Michigan State University - Department of Finance ( email )

Eli Broad Graduate School of Management
315 Eppley Center
East Lansing, MI 48824-1122
United States
517-353-3019 (Phone)
517-432-1080 (Fax)

Kedran Rae Garrison

Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA) ( email )

77 Massachusetts Avenue
Cambridge, MA 02139-4307
United States

Stewart C. Myers (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

Sloan School of Management
Cambridge, MA 02142
United States
617-253-6696 (Phone)
617-258-6855 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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