Entrepreneur-Financier Contracting: A Theoretical Analysis of the Entrepreneur's Choice of Career Path, Financier, and Contractual Control Right Allocation

Abstract

The UK witnessed a notable rise in the cost of living throughout 2021 and 2022. When the economy is stagnating, dynamic entrepreneurship has the potential to boost the economy and promote growth. Therefore, this thesis focuses on critical decisions made in the context of entrepreneurship. More specifically, this thesis consists of three essays that examine an individual’s choice of career path, choice of investor and an investor’s (venture capitalist) choice of control right allocation, respectively. Despite these three essays are independent, they are also interlinked. To foster entrepreneurship and create an environment that supports and encourages it, it is vital to understand the motivations and the timing behind individuals' choices to establish their own businesses. Hence, in the first essay, we provide a game-theoretic model which examines an aspiring entrepreneur’s career choice between a corporate employee and a self-employed entrepreneur. We focus on investigating the influence of potential investor’s competence, nature of involvement (support/interference), on the individual’s intention to dive into entrepreneurship. Next, after the individual has chosen the entrepreneurial path, there often comes a time when the entrepreneur has to look for an investor. Having a compatible investor on board can make a significant difference in the success of a startup. However, accepting fundings from an incompatible investor can be disastrous. Therefore, in the second essay, by considering both economic factors (such as equity stake, investor abilities) and a behavioural factor (relational rent), we look at the optimal choice of an entrepreneur seeking an investor between a venture capitalist and a startup studio. Next, after the entrepreneur has made her investor choice, here comes the contracting stage. Due to information asymmetry and the divergence in interests between entrepreneurs and investors, double-sided moral hazard and hold up problem may exist. To prevent these problems from harming venture’s performance, it is important for the entrepreneur and the chosen investor to reach an agreement on the allocation of cash-flow right/control right and provisions regarding the operation of the venture. Therefore, in the last essay, we look at investor’s (venture capitalist) choice of control right allocation with renegotiation threat. Additionally, recent research shows that behavioural factors such as empathy and trust can mitigate the double-sided moral hazard and hold-up problems (e.g., Utset 2002). In line with this collection of literatures, we incorporate the behavioural factor (empathy) into the model and study the combined impact of both economic and behavioural factors on the venture capitalist’s choice of control right allocation and on her renegotiation incentive.

Overall, by taking the perspective of both the individual (entrepreneur) and the investor, this thesis examines several critical decisions made in the process of launching/funding/developing a startup. Gaining a full understanding of the decision-making process regarding these critical matters can help promote entrepreneurship and make a positive impact on the entrepreneurial environment.

Date of Award	2 Oct 2024
Original language	English
Awarding Institution	University of Bath
Supervisor	Richard Fairchild (Supervisor) & Weixi Liu (Supervisor)