Resolving tensions between heterogeneous Investors in a startup


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