Repository logo
 

Resolving tensions between heterogeneous Investors in a startup

Accepted version
Peer-reviewed

Loading...
Thumbnail Image

Type

Article

Change log

Authors

Chen, S 
Lambrecht, BM 

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.

Description

Keywords

Journal Title

Management science

Conference Name

Journal ISSN

0025-1909
1526-5501

Volume Title

Publisher

Institute for Operations Research and Management Sciences

Publisher DOI

Publisher URL

Sponsorship
The authors thank the Cambridge Endowment for Research in Finance (CERF) and the Keynes Fellowship for financial support