Venture Capital (VC) is a segment of the private equity industry, which focuses on investing in new companies with high growth potential and accompanying high risk. This risk profile of such investments is related to high market and technology uncertainties as well as high information asymmetry and agency cost between VC investors and company management. In this uncertain environment, it is not possible for VC investors to predict with reasonable certainty the future performance of an investee company and to derive a reliable estimate of company value at the outset of the investment. Instead, investors address this issue by designing and negotiating complex investment contracts. These contracts provide them with information and management rights to actively monitor and influence the investee company’s performance as well as with decision rights related to future corporate events (see Klausner, 2001; Sahlman, 1990; Schertler, 2001).
KeywordsVenture Capital Option Price Real Option Initial Public Offering Underlying Asset
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