Using a Nash bargaining approach, we analyze the financing contract between the entrepreneur and the venture capitalist with double-sided moral hazard in a start-up enterprise. Our results show that there… Click to show full abstract
Using a Nash bargaining approach, we analyze the financing contract between the entrepreneur and the venture capitalist with double-sided moral hazard in a start-up enterprise. Our results show that there exists an optimal contract set between the entrepreneur and the venture capitalist, in which all contracts achieve an identical second-best social state. Within the optimal contract set, there exists continuum of joint debt-equity financing. The pure equity financing contract exists in the optimal contract set when the ratio of total social surplus to the amount of investment is greater than a threshold.
               
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