Your friend Dave wants to open an ice cream stand. He knows the business, and you know him to be honest and generally hard working. He needs $50,000 but has only $3,000 or his own to invest. You are thinking of forming a syndicate of stockholders; each of the 20 of you would put up $2,350 to make up the other $47,000, and Dave would get a 10% share of the profits (as well as a reasonable salary for Dave).
(a) What agency (moral hazard) problems do you see in this arrangement?
(b) What steps could Dave and the syndicate take to minimize those problems?