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Optimal contingent payment mechanisms and entrepreneurial financing decisions

Author

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  • Tavares-Gärtner, Miguel
  • Pereira, Paulo J.
  • Brandão, Elísio

Abstract

We explore Contingent Payment Mechanisms (also known as Contingent Earn-Outs) as a capital raising strategy surrounding Entrepreneurial Financing decisions. Unlike previous literature, which investigates how Contingent Payment Mechanisms are used within the context of mergers and acquisitions, we show how an optimum contingent payment might be designed so that one Entrepreneur and one external equity provider – taken as a Venture Capitalist – are simultaneously and jointly willing to support a given Entrepreneurial Firm and its growth strategy. We show that such optimum contingent payment might be designed for a range of different types of contingent payments, for which we present a novel taxonomy. As closed-form solutions underlay the terms of such optimum contingent payments, we provide a tractable analytical tool for Entrepreneurs and Venture Capitalists to easily contract these Contingent Payment Mechanisms.

Suggested Citation

  • Tavares-Gärtner, Miguel & Pereira, Paulo J. & Brandão, Elísio, 2018. "Optimal contingent payment mechanisms and entrepreneurial financing decisions," European Journal of Operational Research, Elsevier, vol. 270(3), pages 1182-1194.
    • Handle: RePEc:eee:ejores:v:270:y:2018:i:3:p:1182-1194
    DOI: 10.1016/j.ejor.2018.04.044
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    Citations

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    Cited by:

    1. Thomas W. Archibald & Edgar Possani, 2021. "Investment and operational decisions for start-up companies: a game theory and Markov decision process approach," Annals of Operations Research, Springer, vol. 299(1), pages 317-330, April.
    2. Dahlen, Niklas & Lahmann, Alexander & Schreiter, Maximilian, 2024. "Panacea for M&A dealmaking? Investor perceptions of earnouts," Finance Research Letters, Elsevier, vol. 60(C).
    3. Ferreira, Ricardo M. & Pereira, Paulo J., 2021. "A dynamic model for venture capitalists’ entry–exit investment decisions," European Journal of Operational Research, Elsevier, vol. 290(2), pages 779-789.
    4. Driouchi, Tarik & Trigeorgis, Lenos & So, Raymond H.Y., 2020. "Individual antecedents of real options appraisal: The role of national culture and ambiguity," European Journal of Operational Research, Elsevier, vol. 286(3), pages 1018-1032.

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