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.
JEL Codes
G24, G32, M13
Keywords
Venture Capital, Equity
Recommended Citation
Booth, G. Geoffrey; Dalgic, Orkunt M.; and Young, Allan
(2004)
"The Staging of Venture Equity Capital and Venture Capitalist Bargaining Power,"
Journal of Entrepreneurial Finance and Business Ventures:
Vol. 9:
Iss.
3, pp. 29-40.
DOI: https://doi.org/10.57229/2373-1761.1063
Available at:
https://digitalcommons.pepperdine.edu/jef/vol9/iss3/4
