Ventures are often financed in several stages. Stage financing provides a real option valuable when facing external uncertainty. However, stage financing may also induce investor opportunism, if the property rights on an invention are not sufficiently protected. We look at the case where the incumbent investor demands a greater share on the venture's return before financing the next stage. If the entrepreneur does not agree, the investor might use the idea for his own purposes. This threat may force the entrepreneur to continue under less favorable financial terms. As a consequence, however, she might choose aneffort level that is too low (underinvestment).
Investor opportunism is less likely to occur, if investor's residual cash-flow-rights are contingent on verifiable 'milestones' in the previous stage. Such provisions are quite common.
The impact of patent law is important. So far, it has primarily been seen as an instrument balancing the trade-off between setting incentives to innovate and limiting the monopoly power of patent holders. I argue there is an additional goal of patent law: Namely, mitigating conflicts of interest in the venture financing process, thereby making innovations more likely."
interesting paper authored by 