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Booth, G. Geoffrey
Dalgic, Orkunt
Young, Allan
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[Journal:] Journal of Entrepreneurial Finance, JEF [ISSN:] 1551-9570 [Volume:] 9 [Year:] 2004 [Issue:] 3 [Pages:] 29-39
In this paper we look at the effects of bargaining power on the types of entrepreneurial projects chosen by venture capitalists and show that a wealth-constrained venture capitalist prefers to provide equity financing to a two-stage rather than to a similar single-stage project. While the venture capitalist does not have bargaining power over the entrepreneur of a single-stage project and is thus unable to extract any surplus, the venture capitalist does have this advantage in a two-stage project and, provided the project is good, can demand a portion of the surplus as a pre-condition for providing follow-on capital. This suggests that venture capitalists should stage their capital investments in order to improve their bargaining power, allowing them to earn greater profits from successful entrepreneurial projects.
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