Contingent Payment Mechanisms and Entrepreneurial Financing Decisions

48 Pages Posted: 10 Mar 2016

See all articles by Miguel Tavares Gärtner

Miguel Tavares Gärtner

School of Economics, University of Porto; CEF.UP - Center for Economics and Finance at UP

Paulo Jorge Pereira

Universidade do Porto - Faculdade de Economia (FEP)

Elisio Brandao

Universidade do Porto - Faculdade de Economia (FEP)

Date Written: March 4, 2016

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.

Keywords: Venture Capital, Entrepreneurial Finance, Real Options, Growth Options, Entrepreneurship, Earn-Outs, Contingent Payments

JEL Classification: G24, G31, G34, L26, M13

Suggested Citation

Tavares Gärtner, Miguel de Oliveira and Pereira, Paulo and Brandão, Elísio Fernando Moreira, Contingent Payment Mechanisms and Entrepreneurial Financing Decisions (March 4, 2016). Available at SSRN: https://ssrn.com/abstract=2742214 or http://dx.doi.org/10.2139/ssrn.2742214

Miguel de Oliveira Tavares Gärtner (Contact Author)

School of Economics, University of Porto ( email )

Rua Roberto Frias
s/n
Porto, 4200-464
Portugal

HOME PAGE: http://www.fep.up.pt

CEF.UP - Center for Economics and Finance at UP ( email )

Rua Dr. Roberto Frias
Porto, 4200-464
Portugal

HOME PAGE: http://cefup.fep.up.pt/

Paulo Pereira

Universidade do Porto - Faculdade de Economia (FEP) ( email )

Rua Roberto Frias
s/n
Porto, 4200-464
Portugal

Elísio Fernando Moreira Brandão

Universidade do Porto - Faculdade de Economia (FEP) ( email )

Rua Roberto Frias
s/n
Porto, 4200-464
Portugal

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