Based on incomplete contract, from the angle of relieving investor and entrepreneur hold up the other party, based on extending the risk preferences of entrepreneur and assuming firm's state variable, by introducing the entrepreneur's ex ante effort, entrepreneur and investor's bargaining power, firm's interim performance signal, investor's investment, manage and monitor cost, project's liquidation values, etc., the paper builds up the model of dynamic control rights allocation in VC-backed firms, by comparing the investor and entrepreneur's payoffs and firm's value of different control rights allocation, to determine the optimal control rights allocation. The results of research show that, investor control and contingent control alternate to realize the optimal control rights allocation: when the entrepreneur's bargaining power is stronger or lower, and if the firm's performance signal is lower, the investor control allocation can be optimal, and the firm's value does not change; when the entrepreneur's bargaining power is lower and is lower than the threshold, and if the firm's performance signal is higher, the contingent control allocation can be optimal, otherwise the investor control allocation can be optimal, the firm's value changes according to the change of each variable.
Key words
incomplete contracts /
hold-up /
renegotiation /
control rights
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