Staged Financing in Venture Capital: Moral Hazard and Risks

This paper investigates staged ... nancing in an environment where an entrepreneur faces an imperfect capital market and an investor faces moral hazard and uncertainty. Staged ... nancing plays two roles in this model: to control risk and to mitigate moral hazard. Using parametric functions and comparing staged ... nancing with upfront ... nancing, we discover a few interesting properties of staged ... nancing. In particular, we show that when used together with a sharing contract, staged ... nancing acts as an e¤ ective complementary mechanism to contracting in controlling agency problems. ¤ We are grateful for a referee’s comments, which have substantially improved our paper. We are also grateful for the ... nancial support from the Research Grants Council of Hong Kong. Remaining errors are, however, ours. Our addresses are, respectively, Department of Economics, Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong, and Johnson School of Management, Cornell University, Ithaca, NY 14850, U.S.A.