Entrepreneurial Finance
Prof. Tristan De Blick
2025-2026
Gabriel Gonzalez-Lopez
1
,Entrepreneurial Finance 1
1. Introduction 3
2. Sources of Financing 8
3. Financial Planning 16
5. Valuation 27
6. Venture Capital 35
7. Deal Structures 43
9. Crowdfunding as a source of funding for your business 48
10. Legal, Tax, and Regulatory Frameworks: The Rules of the Game 51
2
, 1. Introduction
What De nes the Entrepreneurial Context? To understand Entrepreneurial Finance (EF),
we must first understand the context in which it operates. According to Howard
Stevenson, an entrepreneur is someone who "pursues opportunities with no regard to
resources currently controlled". This means operating in an environment characterized by
extreme uncertainty, limited resources, and the need to recognize or create opportunities.
Unlike traditional Corporate Finance; which relies on a company's track record, historical
cash flows, and public information, EF is driven by newness, highly contingent contracts,
and private information.
Because of this, investors face several severe risks: technological risk (will the product
work?), market risk (will customers buy it?), execution risk (can the team deliver?), and
funding risk (can we secure enough cash?).
Traditional Corporate Finance (CF) relies on a company's track record, historical data, and
public information. EF, by contrast, is characterized by newness, extreme uncertainty, and
private information. This creates severe information problems
The Principal-Agent Problem in Startups This high-risk environment creates a
pronounced "Principal-Agent" problem. The investor (Principal) and the entrepreneur
(Agent) often have different goals and different levels of information. Because a startup
usually lacks a track record, founders might present overly optimistic projections or
withhold negative facts to secure funding. This creates two main issues:
• Adverse Selection: Before investing, the investor struggles to distinguish between
good and bad entrepreneurs due to hidden characteristics.
• Moral Hazard: After investing, the investor faces the risk that the entrepreneur
might not work as hard as promised or might take reckless risks due to hidden
actions.
To solve these agency problems, EF relies on specific mechanisms:
• Signaling: Entrepreneurs demonstrate quality through verifiable actions, such as
securing endorsements from top technical experts, gathering customer pre-orders,
or investing their own savings.
• Bonding & Self-Selection: Investors offer contracts that require the entrepreneur
to share the risk. For instance, staging the investment (releasing funds only when
milestones are hit) or using vesting schedules (where founders earn their shares
over time) proves the founder is committed for the long haul.
• Monitoring: Investors take active roles, such as occupying a board seat and
requiring strict monthly reporting, to observe the entrepreneur's behavior.
3
fi
, The Stages of Funding: Who Invests When? A venture’s financial needs evolve
drastically as it moves through its life cycle:
1. Seed Stage (Idea to First Customer): The goal here is prototyping and market
validation. Funding comes from the founders, the "3Fs" (Friends, Family, Fools),
and Crowdfunding, which is excellent not just for raising capital, but for validating
the market, engaging early backers, and testing product features.
◦ At this stage, founders also look to Incubators (which offer organic growth
support, networks, and are often tied to universities) and Accelerators.
Accelerators are intense, cohort-based programs lasting 3-6 months that
culminate in a "Demo Day". They often provide a small stipend in exchange
for 5-10% equity. Warning: Entrepreneurs must be careful with accelerators
that ask for "non-dilutable" equity, which can severely penalize the
founders' ownership during future funding rounds.
2. Startup Stage (First Sales to Break-Even): The company needs cash to optimize
its business model and grow the customer base. Business Angels (BAs) are critical
here. Angels are high-net-worth individuals investing their own money, time, and
expertise. They are motivated by financial returns but also by the desire to give
back to the ecosystem.
3. Growth Stage: The company is profitable at its core but needs massive capital to
scale internationally or dominate a market. This is the domain of Venture Capital
(VC) and Private Equity.
4. Maturity: Growth slows, and the focus shifts to maintaining market share,
generating dividends, or preparing for an exit via IPO or acquisition.
4
Prof. Tristan De Blick
2025-2026
Gabriel Gonzalez-Lopez
1
,Entrepreneurial Finance 1
1. Introduction 3
2. Sources of Financing 8
3. Financial Planning 16
5. Valuation 27
6. Venture Capital 35
7. Deal Structures 43
9. Crowdfunding as a source of funding for your business 48
10. Legal, Tax, and Regulatory Frameworks: The Rules of the Game 51
2
, 1. Introduction
What De nes the Entrepreneurial Context? To understand Entrepreneurial Finance (EF),
we must first understand the context in which it operates. According to Howard
Stevenson, an entrepreneur is someone who "pursues opportunities with no regard to
resources currently controlled". This means operating in an environment characterized by
extreme uncertainty, limited resources, and the need to recognize or create opportunities.
Unlike traditional Corporate Finance; which relies on a company's track record, historical
cash flows, and public information, EF is driven by newness, highly contingent contracts,
and private information.
Because of this, investors face several severe risks: technological risk (will the product
work?), market risk (will customers buy it?), execution risk (can the team deliver?), and
funding risk (can we secure enough cash?).
Traditional Corporate Finance (CF) relies on a company's track record, historical data, and
public information. EF, by contrast, is characterized by newness, extreme uncertainty, and
private information. This creates severe information problems
The Principal-Agent Problem in Startups This high-risk environment creates a
pronounced "Principal-Agent" problem. The investor (Principal) and the entrepreneur
(Agent) often have different goals and different levels of information. Because a startup
usually lacks a track record, founders might present overly optimistic projections or
withhold negative facts to secure funding. This creates two main issues:
• Adverse Selection: Before investing, the investor struggles to distinguish between
good and bad entrepreneurs due to hidden characteristics.
• Moral Hazard: After investing, the investor faces the risk that the entrepreneur
might not work as hard as promised or might take reckless risks due to hidden
actions.
To solve these agency problems, EF relies on specific mechanisms:
• Signaling: Entrepreneurs demonstrate quality through verifiable actions, such as
securing endorsements from top technical experts, gathering customer pre-orders,
or investing their own savings.
• Bonding & Self-Selection: Investors offer contracts that require the entrepreneur
to share the risk. For instance, staging the investment (releasing funds only when
milestones are hit) or using vesting schedules (where founders earn their shares
over time) proves the founder is committed for the long haul.
• Monitoring: Investors take active roles, such as occupying a board seat and
requiring strict monthly reporting, to observe the entrepreneur's behavior.
3
fi
, The Stages of Funding: Who Invests When? A venture’s financial needs evolve
drastically as it moves through its life cycle:
1. Seed Stage (Idea to First Customer): The goal here is prototyping and market
validation. Funding comes from the founders, the "3Fs" (Friends, Family, Fools),
and Crowdfunding, which is excellent not just for raising capital, but for validating
the market, engaging early backers, and testing product features.
◦ At this stage, founders also look to Incubators (which offer organic growth
support, networks, and are often tied to universities) and Accelerators.
Accelerators are intense, cohort-based programs lasting 3-6 months that
culminate in a "Demo Day". They often provide a small stipend in exchange
for 5-10% equity. Warning: Entrepreneurs must be careful with accelerators
that ask for "non-dilutable" equity, which can severely penalize the
founders' ownership during future funding rounds.
2. Startup Stage (First Sales to Break-Even): The company needs cash to optimize
its business model and grow the customer base. Business Angels (BAs) are critical
here. Angels are high-net-worth individuals investing their own money, time, and
expertise. They are motivated by financial returns but also by the desire to give
back to the ecosystem.
3. Growth Stage: The company is profitable at its core but needs massive capital to
scale internationally or dominate a market. This is the domain of Venture Capital
(VC) and Private Equity.
4. Maturity: Growth slows, and the focus shifts to maintaining market share,
generating dividends, or preparing for an exit via IPO or acquisition.
4
