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Contingent Payment Mechanisms and Entrepreneurial Financing Decisions

Author

Listed:
  • Miguel de Oliveira Tavares Gärtner

    (CEF.UP and University of Porto, Portugal)

  • Paulo Jorge Pereira

    (CEF.UP and University of Porto, Portugal)

  • Elísio Brandão

    (University of Porto, Portugal)

Abstract

We discuss how Contingent Payment Mechanisms (also known as Contingent Earn-Outs) enable of Entrepreneurial Financing decisions. First, we introduce a taxonomy of contingent payment mechanisms, by combining features regarding their term and amount. Second, we introduce each of these alternative mechanisms on a previously developed real options framework for analyzing Entrepreneurial Financing decisions, in which one wealth constrained Entrepreneur is looking for an external equity provider – taken as a Venture Capitalist – to support a given growth strategy. We conclude that different contingent payment mechanisms are equivalent in obtaining joint support from Entrepreneurs and Venture Capitalists regarding optimum investment timing and, therefore, that the choice on the optimum mechanism to use depends on variables which are exogenous to the model, such as liquidity preferences or constraints, timing requirements, post-deal integration or overall deal terms.

Suggested Citation

  • Miguel de Oliveira Tavares Gärtner & Paulo Jorge Pereira & Elísio Brandão, 2016. "Contingent Payment Mechanisms and Entrepreneurial Financing Decisions," FEP Working Papers 574, Universidade do Porto, Faculdade de Economia do Porto.
    • Handle: RePEc:por:fepwps:574
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    References listed on IDEAS

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    1. Stefano Caselli & Stefano Gatti & Marco Visconti, 2006. "Managing M&A Risk with Collars, Earn‐outs, and CVRs," Journal of Applied Corporate Finance, Morgan Stanley, vol. 18(4), pages 91-104, September.
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    3. Croce, Annalisa & Martí, José & Murtinu, Samuele, 2013. "The impact of venture capital on the productivity growth of European entrepreneurial firms: ‘Screening’ or ‘value added’ effect?," Journal of Business Venturing, Elsevier, vol. 28(4), pages 489-510.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Venture Capital; Entrepreneurial Finance; Real Options; Growth Options; Entrepreneurship; Earn-Outs; Contingent Payments;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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