Assignment: Suppose you have decided to become a venture capitalist, but you are worried about capital losses and lower rate of return. Therefore, you must review important information related to financial contracting with optimistic entrepreneurs.
Problem 1) What are the important points (terms and conditions, clauses) that you should consider adding in the financial contract with optimistic entrepreneurs to mitigate capital losses risk and to achieve higher rate of return? For example, you can sign a contract with optimistic entrepreneurs that grants you cash flow rights, voting rights, control rights, etc., to mitigate capital losses risk.
Problem 2) Are there any challenges with the above mentioned points (important points that you described in question one, e.g., cash flow rights, voting rights, control rights, etc.) that you should be aware of? For example, there can be conflict of interest between an agent (optimistic entrepreneur) and principal (Shareholder : you) because entrepreneur can take actions that yield private benefits.