Citation:
[Journal:] The Journal of Entrepreneurial Finance and Business Ventures [ISSN:] 1551-9570 [Volume:] 9 [Issue:] 3 [Publisher:] The Academy of Entrepreneurial Finance (AEF) [Place:] Montrose, CA [Year:] 2004 [Pages:] 29-39
Abstract:
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.