Resolving Tensions between Heterogeneous Investors in a Startup

Accounting and Finance

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Keywords

investment, payout, startup, risk preferences, group policy

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Research output: Contribution to Journal/Magazine › Journal article › peer-review

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Resolving Tensions between Heterogeneous Investors in a Startup. / Chen, Shiqi; Lambrecht , Bart.
In: Management Science, 01.01.2024.

Research output: Contribution to Journal/Magazine › Journal article › peer-review

Bibtex

@article{22c6d7a389e545b8b041d67f52affe00,

title = "Resolving Tensions between Heterogeneous Investors in a Startup",

abstract = "Legal scholars highlight the tensions that exist between different classes of shareholders in startups. We model a startup owned by undiversified investors with heterogeneous capital contributions and risk preferences. A social planner runs the firm on behalf of all investors. We compare investors' expected utility with a hypothetical first-best decentralized benchmark. The startup's optimal investment policy is pro-cyclical and a time-varying weighted average of shareholders' optimal investment policies. The optimal contracts issued to investors are tailor-made, interdependent, and include equity claims resembling preferred stock with heterogeneous payout caps, leading to a complex capitalization table as more investors join the startup.",

keywords = "investment, payout, startup, risk preferences, group policy",

author = "Shiqi Chen and Bart Lambrecht",

year = "2024",

month = jan,

day = "1",

language = "English",

journal = "Management Science",

issn = "0025-1909",

publisher = "INFORMS Inst.for Operations Res.and the Management Sciences",

}

RIS

TY - JOUR

T1 - Resolving Tensions between Heterogeneous Investors in a Startup

AU - Chen, Shiqi

AU - Lambrecht , Bart

PY - 2024/1/1

Y1 - 2024/1/1

N2 - Legal scholars highlight the tensions that exist between different classes of shareholders in startups. We model a startup owned by undiversified investors with heterogeneous capital contributions and risk preferences. A social planner runs the firm on behalf of all investors. We compare investors' expected utility with a hypothetical first-best decentralized benchmark. The startup's optimal investment policy is pro-cyclical and a time-varying weighted average of shareholders' optimal investment policies. The optimal contracts issued to investors are tailor-made, interdependent, and include equity claims resembling preferred stock with heterogeneous payout caps, leading to a complex capitalization table as more investors join the startup.

AB - Legal scholars highlight the tensions that exist between different classes of shareholders in startups. We model a startup owned by undiversified investors with heterogeneous capital contributions and risk preferences. A social planner runs the firm on behalf of all investors. We compare investors' expected utility with a hypothetical first-best decentralized benchmark. The startup's optimal investment policy is pro-cyclical and a time-varying weighted average of shareholders' optimal investment policies. The optimal contracts issued to investors are tailor-made, interdependent, and include equity claims resembling preferred stock with heterogeneous payout caps, leading to a complex capitalization table as more investors join the startup.

KW - investment

KW - payout

KW - startup

KW - risk preferences

KW - group policy

M3 - Journal article

JO - Management Science

JF - Management Science

SN - 0025-1909

ER -

Research

Electronic data

Keywords