Financing and Control Rights: Entrepreneurial Choice of Funding Source

, Booth PhD candidate Joint Financial Economics 

This paper studies the entrepreneurial choice of financing with an emphasis on the difference between the control rights of financiers. I consider the choice of an entrepreneur between a venture capitalist and a bank and derive the conditions under which each financing instrument is sustainable, as well as entrepreneurial choice when he has access to both methods. The main trade-off is that a venture capitalist is able to enhance the prospects of the start-up but is prone to holding up the entrepreneur ex-post in return for his welfare enhancing contributions. Furthermore, I address how the venture capitalist can mitigate his commitment problem in order not to lose profitable investment opportunities, as well as effect of entrepreneurial private benefits on the choice of financing instrument.