On the governance of start-ups.

Summary The paper analyzes an entrepreneur-investor relationship in a stylized model in which (i) financial needs, unknown ex ante, occur sequentially, (ii) a major decision must be made at project maturity, (iii) this decision depends on private information held by the entrepreneur but observable by the investor at some cost. The two partners agree on a governance system including a sharing of future cash flows and an allocation of control over the investment decision. The article shows that control should be given to the entrepreneur for low levels of investment, but that it should be transferred to the investor when the investment exceeds a certain threshold.