Abstract
I characterize an optimal, incentive compatible, and renegotiation proof contract of venture capital (VC ) financing of a startup (that may be successful or not) whose rate of arrival of success is a function of the accumulated investment stock. The contract depends on the startup valuation, prior probability of success, and initial capital. Sufficient conditions for existence of such a contract are specified. The paper explains why the startup has to rely on different ways of financing in different stages of its life, and why VC financing is not feasible in early stages of development of the startup.
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