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Staging of Venture Financing, Investor Opportunism and Patent Law


  • Jochen Bigus

    Corresponding author
    1. The author is from the University of Osnabrück. For very helpful comments, he would like to thank an anonymous referee, Henrik Lando, Peter Pope (an editor) and seminar participants in Bologna, Copenhagen, Hamburg and at the American Law and Economics Association, Northwestern 2003, European Economic Association, Stockholm 2003, European Financial Management Association, Basel 2003, German Finance Association, Cologne 2002. He is also grateful for a research grant given by the German Science Foundation.
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* Address for correspondence: Jochen Bigus, University of Osnabrück, Department of Management and Economics, Rolandstr. 8, D-49069 Osnabrück, Germany. e-mail:


Abstract:  Stage financing provides a real option that is valuable when facing external uncertainty. However, it may also induce investor hold-up, if the property rights on an invention are not sufficiently protected. As a consequence, the entrepreneur may not work hard. Investor opportunism is less likely to occur, if investors' residual cash-flow-rights are contingent on verifiable ‘milestones’ in the previous stage. Equity-linked financing also provides high-powered incentives to the investor not to ‘steal the idea’ because his payoff becomes sensitive to the project value. The paper provides a new explanation for both types of contractual provisions.