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DEALING WITH VENTURE CAPITALISTS: SHOPPING AROUND OR EXCLUSIVE NEGOTIATION

Abstract : We study the optimal negotiation strategy of an entrepreneur who faces two investors with pri-vate information about his project’s profitability. The entrepreneur derives a private benefit ofcontrol so that he cares not only about expected monetary profits, but also about the probabilityto obtain financing. If he contacts both venture capitalists simultaneously, the entrepreneur ob-tains high expected monetary profits. If he commits to a period of exclusive negotiation with oneventure capitalist, he can increase the probability to obtain financing for riskier projects, but dealterms deteriorate. The optimal negotiation strategy results from this trade-off. We also solve forthe equilibrium financial contracts and obtain implications for venture capitalists’ portfolios andentrepreneurs’ deals. The model predicts in particular that venture capitalists are more likely tofinance projects with equity-like claims when projects are riskier and venture capitalists are moreexperienced. Also, high private benefit entrepreneurs are more likely to receive a single offer andto be financed by less experienced venture capitalists.
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https://hal-univ-pau.archives-ouvertes.fr/hal-02938912
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Submitted on : Tuesday, September 15, 2020 - 11:21:31 AM
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Catherine Casamatta, Carole Haritchabalet. DEALING WITH VENTURE CAPITALISTS: SHOPPING AROUND OR EXCLUSIVE NEGOTIATION. 2013. ⟨hal-02938912⟩

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