Investments in new ventures involve financial contracts between an entrepreneur and outside investors. Investors, such as venture capital firms, represent well-diversified investors. In contrast, the entrepreneur must commit a substantial fraction of human and financial capital to the venture....

Investments in new venture involve financial contracts between an entrepreneur and one or more outside investors. Outside investors (such as venture capital firms) generally represent well-diversified investors. Even private investors generally commit small fractions of total wealth to any given...