A multi-period game theoretic model of venture capitalists and entrepreneurs

This study examines the relationship between a venture capitalist and an entrepreneur and follows it from its inception to the exit stage. The model we use is a multi-period game theoretic model with moral hazard where the contract is set in the first period. The contribution of the study lies in the insights it provides on optimal contracts and its characterization of an endogenous exit point. Specifically, the paper shows that the optimal incentive scheme should backload all incentive payments to the entrepreneur as much as possible. Consequently, a straight debt contract would be optimal in venture financing. (C) 2002 Elsevier Science B.V. All rights reserved.