The Impact of Financial Instruments on Ownership and Risk- Return in Venture Capital Investment

Abstract

This study provides an analytical framework to split cash flows, risk and value of a venture project between the venture capitalist and the entrepreneur under various financial instruments. By introducing the degree of risk aversion of the venture capitalist and the opportunity cost of the entrepreneurial labor services over the life of the project, this report addresses an important issue of the selection of financial instrument (s) which is acceptable to both parties. Through an extended example, the results of the theoretical discussion are derived numerically. A discussion of the restrictive assumptions has been developed for the analysis, and a list of possible extensions is also provided.