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Resolving Tensions Between Heterogeneous Investors in a Startup

Author

Listed:
  • Shiqi Chen

    (Department of Accounting and Finance, Lancaster University Management School, Lancaster LA1 4YX, United Kingdom)

  • Bart M. Lambrecht

    (Judge Business School, University of Cambridge, Cambridge CB2 1AG, United Kingdom; and Centre for Economic Policy Research, London EC1V 0DX, United Kingdom)

Abstract

Legal scholars highlight the tensions that exist between different classes of shareholders in startups. We model a startup owned by undiversified investors with heterogeneous capital contributions and risk preferences. A social planner runs the firm on behalf of all investors. We compare investors’ expected utility with a hypothetical first-best decentralized benchmark. The startup’s optimal investment policy is procyclical and a time-varying weighted average of shareholders’ optimal investment policies. The optimal contracts issued to investors are tailor-made, interdependent, and include equity claims resembling preferred stock with heterogeneous payout caps, leading to a complex capitalization table as more investors join the startup.

Suggested Citation

  • Shiqi Chen & Bart M. Lambrecht, 2025. "Resolving Tensions Between Heterogeneous Investors in a Startup," Management Science, INFORMS, vol. 71(3), pages 2678-2695, March.
    • Handle: RePEc:inm:ormnsc:v:71:y:2025:i:3:p:2678-2695
    DOI: 10.1287/mnsc.2022.01724
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