Please use this identifier to cite or link to this item:
Dubil, Robert
Year of Publication: 
[Journal:] Journal of Entrepreneurial Finance, JEF [ISSN:] 1551-9570 [Volume:] 9 [Year:] 2004 [Issue:] 3 [Pages:] 1-14
For venture capital firms, facing undiversifiable risks, multi-staged financing is an optimal contract which offers significant risk reduction at a cost of only slightly lower potential return. The optimality does not depend on the presence of moral hazard and agency problems. Our theoretical model of multi-stage financing, largely based on Asian option pricing theory, allows us to compute the risk reduction ratio due to multi-staging. The return on a staged financing plan is equivalent to an exchange of a straight equity stake for that acquired through stochastic averaging over time. We compare standard deviation ratios for staged vs. up-front financings as well as across asset classes. We find that risk mitigation due to multi-staging is significant in and of itself and enough to markedly improve venture capital's risk-reward ratios relative to alternatives.
Document Type: 

Files in This Item:
340.44 kB

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.