Section outline

  • In the previous section, we have seen that the structure of the deal can have far-reaching value and incentive implications. The purpose of this section is to take a step back and discuss more generally what the investors and the entrepreneurs actually want from a deal, where they have common interests, and where there are potential sources of disagreement. Based on this, we then derive the three major elements of financial deals:

    • Division of financial returns
    • Dynamic allocation of control
    • Clear path to exit

     

    We investigate whether traditional financing instruments like debt and common equity can incorporate these deal elements. We see that common equity is not so common after all and that it offers many features to accommodate important deal elements. However, we still need more sophisticated financial contracting to address the basic concerns of the investors and the entrepreneurs.