Volume 34, Issue 1 (IJIEPR 2023)                   IJIEPR 2023, 34(1): 1-18 | Back to browse issues page

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Fattahi K, Bonyadi Naeini A, Sadjadi S J. New Applied Mechanism for Fair Equity Sharing to Overcome The Challenges of Venture Capital Financing. IJIEPR 2023; 34 (1) :1-18
URL: http://ijiepr.iust.ac.ir/article-1-1437-en.html
1- Ph.D. of Management of Technology at Iran University of Science and Technology (IUST)
2- Department of Management and Business Engineering, School of Progress Engineering, Iran University of Science and Technology (IUST) , bonyadi@iust.ac.ir
3- Department of Industrial Engineering, Iran University of Science and Technology (IUST)
Abstract:   (4557 Views)
Venture capital (VC) financing is associated with the challenges of double-sided moral hazard, and uncertainty, which leads to the difficulty in estimating the venture's value accurately and consequently the impossibility of determining the optimal equity sharing between the entrepreneur and investor. Traditionally, convertible preferred equity mechanisms used to be implemented as an incentive to decline moral hazard. However, despite the emphasis on investor risk-taking, such mechanisms transfer the investor risk to the entrepreneur and do not mitigate the incentive of opportunistic behaviors. Furthermore, according to the literature review, and to the best of the authors’ knowledge, there has not been developed any practical mechanism for equity sharing in VC financing up to now. This paper proposes a fair equity sharing mechanism, which alleviates the above-mentioned deficiencies. It adjusts both parties' share during the equity dilution in each stage of financing, regarding the difference between the venture's ex-ante and ex-post values. Moreover, it manages uncertainty by applying staged financing and the option of abandonment at the end of each stage. The proposed mechanism has been verified by using the mathematical tools and drawing its curves for a case study.
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Type of Study: Research | Subject: Technology and Knowledge Management
Received: 2022/02/3 | Accepted: 2023/01/16 | Published: 2023/03/10

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