Staged financing in venture capital: moral hazard and risks

This paper investigates staged financing in an environment where an entrepreneur faces an imperfect capital market and an investor faces moral hazard and uncertainty. Staged financing plays two roles in this model: to control risk and to mitigate moral hazard. Using parametric functions and comparing staged financing with upfront financing, we discover a few interesting properties of staged financing. In particular, we show that when used together with a sharing contract, staged financing acts as an effective complementary mechanism to contracting in controlling agency problems. (C) 2002 Elsevier Science B.V. All rights reserved.