Equity, Personal Collateral and Capital Structure of the Small Entrepreneurial Firm

Abstract

We develop an entrepreneur-focused model for the capital structure of small and entrepreneurial firms. Our model moves from a minimal remuneration that the entrepreneur has to ask because of the risk they incur in the venture and makes two adjustments: first, it takes into consideration entrepreneurs’ overall personal wealth since the grater the personal wealth not invested in the venture the smaller the adverse impact suffered by the entrepreneur; second it includes as wealth invested in the venture the debt collateralized/guaranteed by personal assets (net of any asset that the firm has to repay that loan). Then, we explore how the model adjusts in order to take into consideration the peculiarities of entrepreneurial start-ups, established small entrepreneurial firms and mature and solid ones. Our model suggests that entrepreneurs are more concentrated than usually expected and that equity is not necessarily the most expensive source of finance since debt collateralized/guaranteed by personal assets can be a very expensive source. Our model provides also additional justification for firms to use expensive trade.