Principal-Agent Conflict with Three Dimension Analysis
Principal-Agent Conflict with Three Dimension Analysis
----The Case Report of Conor Medsystems 2010-12-20
Corporate Finance team assignment 1 Parisa khatabakhsh 8004019769 Amanda kolobaric 881020-3920 Can Zhao 8701239231 Jin Zhang 880812F340
“…I think valuation is critical, but I’d also say that a deal should never go on just valuation alone. The quality of an investor, their understanding of the technology and space, and their support of the company over multiple financings are all just as important.” -Frank Litvack, Chairman and CEO of Conor Medsystems
Technique priority vs. Risk-control priority Mitigating principal-agent conflicts in start-ups are vital for the company’s future success. The conflict is so universal that it can be reflected from the technology choice, the team structure and financing decomposition of the start-ups. In our case, the entrepreneurs in Conor Medsystems, face multiple trade-offs (tech, team and financing), that each of them can be considered as the “tension” between technique priority (technocrats) and risk-control priority (financial-crats). The results of these trade-offs are ultimately depended on the balance of the tech-financial power struggle. The principal-agent conflicts, according to corporate finance theory, usually happen when entrepreneur make decisions that is in their personal interests rather than in the interest of outsider investors. The self-serving decisions include: First, entrepreneur has intrinsic passion and personal gratification; Second, outside investors pursue the low-risk, low value path rather than high-risk, high-value path; Third, the entrepreneur may have strong personal incentives to continue the project even though it is a losing proposition (see Ogden, et al., 2003). In our case, Litvack and other entrepreneur of Conor Medsystems insist on completing all medical trails with the most cutting-edge technology, which may bring much higher value in the future and also indicate comparable risk.
----The Case Report of Conor Medsystems 2010-12-20
Corporate Finance team assignment 1 Parisa khatabakhsh 8004019769 Amanda kolobaric 881020-3920 Can Zhao 8701239231 Jin Zhang 880812F340
“…I think valuation is critical, but I’d also say that a deal should never go on just valuation alone. The quality of an investor, their understanding of the technology and space, and their support of the company over multiple financings are all just as important.” -Frank Litvack, Chairman and CEO of Conor Medsystems
Technique priority vs. Risk-control priority Mitigating principal-agent conflicts in start-ups are vital for the company’s future success. The conflict is so universal that it can be reflected from the technology choice, the team structure and financing decomposition of the start-ups. In our case, the entrepreneurs in Conor Medsystems, face multiple trade-offs (tech, team and financing), that each of them can be considered as the “tension” between technique priority (technocrats) and risk-control priority (financial-crats). The results of these trade-offs are ultimately depended on the balance of the tech-financial power struggle. The principal-agent conflicts, according to corporate finance theory, usually happen when entrepreneur make decisions that is in their personal interests rather than in the interest of outsider investors. The self-serving decisions include: First, entrepreneur has intrinsic passion and personal gratification; Second, outside investors pursue the low-risk, low value path rather than high-risk, high-value path; Third, the entrepreneur may have strong personal incentives to continue the project even though it is a losing proposition (see Ogden, et al., 2003). In our case, Litvack and other entrepreneur of Conor Medsystems insist on completing all medical trails with the most cutting-edge technology, which may bring much higher value in the future and also indicate comparable risk.