You are an investor that contemplates investing in a new start up. You know that the profitability of the project you ar

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You Are An Investor That Contemplates Investing In A New Start Up You Know That The Profitability Of The Project You Ar 1 (17.02 KiB) Viewed 36 times

You Are An Investor That Contemplates Investing In A New Start Up You Know That The Profitability Of The Project You Ar 2 (48.33 KiB) Viewed 36 times

You are an investor that contemplates investing in a new start up. You know that the profitability of the project you are looking at is either 0 or 2 million dollars. That is, there is some risk regarding the returns of the project with 50% probability it will be very successful (generate a 2 million dollar cash flow) and with 50% chance it will fail (generate a 0 dollar cash flow). You find yourself in the bargaining table with the inventor of the project who tries to sell you their idea and make you invest in it. Consider the following scenarios: mer renonce. That is, you don't know

to put in the project? iii) Now, assume that the risk of the project is due to uncertainty about some aspects of the project. That is, you don't know exactly how the project will be produced, distributed, the details of the business plan etc. Importantly, you know that the start-upper knows all the details about the project and you don't. How much are you willing to invest in the project? Why? How can this asymmetric information problem be resolved in a financial market for venture capital? iv) (This is based on a real contract that financed a very successful Richmond restaurant) Your economic consultant proposes the following contract to finance the start-up: you, the investor, become the owner of the start-up if you invest today. Over time, the start-upper will be buying the start-up from you by paying small monthly installments, based on the start-up's profitability. The contract specifies that if the profitability is not high enough, you (the owner) can sell the firm or demand changes in the firm's strategy. Do you think this contract alleviates the asymmetric information problem discussed in partiib)? Which parts of this contract are generally used in financial markets?