Capital Structure And Design Of Contract In Venture Capital Under Asymmetric Information

The two major forces in venture capital, the venture capital organizations (thecapitalist) and the venture entrepreneur,basically build up a relationship which isbased on agency contract under asymmetric information. The two parties, both withcommon benefits and private benefits as well, not only cooperate with but alsoinfluence one another. Compared with traditional forms of financing, venture capitalis characterized by higher risk and uncertainty of the outcome. Especially, the hightechnology industries are characterized by high degree of uncertainty and asymmetryof information. These characteristics along with high agency cost have led to thedevelopment of the specialized form of venture capital financing.This paper has applied a model and analyzed the behavior of an entrepreneur anda capitalist and the mutual influence on one another with asymmetric information. Itconcludes that the behavior and mutual influence between entrepreneur and capitalisthas an effect on capital structure. Furthermore, incentive arrangement ( α ,χ)betweenentrepreneur and capitalist exerts an influence on capital structure, and vice versa.This conclusion implies that an effective way to implement the well-balance operationand enhance the successful probability of venture capital financing is to design areasonable and flexible venture capital contract.