Start up law Flashcards
What is a dual company structure?
A dual-class structure is a way for founders and key figures to retain control of a company despite holding a smaller financial stake, by issuing different classes of stock with varied voting rights.
Why banks are not an option for innovative firms?
Interest rates, timing of ROI, risk, collaterals. Depends in the type of contract. Banks specialize in loans, Startups are not their business, they not really care about the objective of the company, bank just cares about that you can payback. If they don’t know anything about the business how can the bank be sure if they can payback.
Why investors ask for equity instead of offering loans? What makes it more attractive for them?
You get decision making in the company. Assigning directors. Which is important because you get to direct how your money is being managed.
How investors ensure the right use of the money by directors of the company?
Voting for investing decisions. STAGE FINANCING. PUNISHMENT. CASH DEPRIVATION
What’s Moral Hazard?
Is a situation when one party is promised to behave someway and has the possibility to change that without the other party to stop it. Asymmetric information. Gollum buying a Ferrari.
What’s adverse selection?
Hidden unobservable characteristics. A market process in which buyers or sellers of a product or service are able to use their private knowledge of the risk factors involved in the transaction to maximize their outcomes, at the expense of the other parties to the transaction.
Market for lemons. (Example of sells used cars)
IS THERE SOMETHING IN BETWEEN A LOAN AND EQUITY?
pital that is paid back based on the performance of the company. Non-dilutive means that the current owners do not lose any part of their ownership in the company.
Convertible Bonds are a representation of a loan contract with a piece of paper.
optimal debt-equity ratio or capital structure
is determined at the point where the marginal benefit of keeping the manager from taking perks is offset by the marginal cost of causing risky behavior.
What’s the agency problem?
a (potential) conflict of interest between an agent who takes an action (in this case, the manager choosing the level of perks) and a principal who bears the consequences of that action (other share-holders or creditors. the best way to deal with them is to put the agent on an optimal incentive scheme.
Financial Contracting
the theory of what kind of deals are made between financiers and those who need financing.
What are non-pecuniary benefits?
Perks refer to things like fancy offices, private jets, the easy life, etc.
Diversion in financial contracting
Diversion in financial contracting refers to the misuse or redirection of funds or assets by a borrower or agent for purposes other than those originally intended or agreed upon in a contract. It typically occurs when a borrower (or party with control over resources) uses funds for personal benefit, alternative projects, or activities that are not aligned with the agreed financial arrangements.
What is patronage?
involves providing aid or support to another entity, often with an expectation of loyalty, influence, or benefit in return. (Sponsor)
What happens to a firm financed by a Vc, if the firm performs poorly?
the VCs obtain full control.
And what if the firm financed by a VC performs very well?
The VCs retain their cash flow rights, but relinquish most of their control and liquidation rights. The entrepreneur’s cash flow rights also increase with firm performance