Welcome back to the Conglomerate Junior Scholars Workshop. Today's paper is The (Not So) Puzzling Behavior of Angel Investors by Darian Ibrahim. Darian is an Associate Professor of Law at the University of Arizona James E. Rogers College of Law and teaches and writes in the fields of Business Associations, Law & Entrepreneurship and Contracts. Today's expert commentary will be provided by Larry Ribstein, Barbara Black, George Dent and David Hoffman.
We invite readers to comment on the paper (and the comments) in the comments section of this post. In the interest of running this workshop like a physical world conference, no anonymous commenters, please.
The abstract for the paper is here:
Angel investors fund start-ups in their earliest stages, which creates a contracting environment rife with uncertainty, information asymmetry, and agency costs in the form of potential opportunism by entrepreneurs. Venture capitalists also encounter these problems in slightly later-stage funding, and use a combination of staged financing, preferred stock, board seats, negative covenants, and specific exit rights to respond to them. Curiously, however, traditional angel investment contracts employ none of these measures, which is a marked departure from what financial contracting theory would predict. This article explains this (not so) puzzling behavior on the part of angel investors, and also explains why some angels are moving toward venture capital-like organization and adopting venture capital-like contracts in the process.
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