Equity‐settled share‐based payments and their (strategic) use under asymmetric information

Abstract

AbstractShare‐based payments are of widespread use in today's economy. Consulting firms are increasingly accepting equity compensation for their services (particularly from startups) and many governments provide fiscal incentives to support this choice. Likewise, profit‐sharing licensing is an on‐trend business practice by innovative firms and patent holders when transferring their technology to interested adopters. This paper unveils strategic considerations according to which an agent/seller designs its optimal policy in regard to the equity share to request in exchange for its service, technology, or trademark. The model assumes a fringe of interested users/customers differentiated by both the support they need from the seller and the value of the underlying relationship; and also holding an informational disadvantage on their own type. Given the seller's cost configuration, equilibrium outcomes entail entering a profit‐sharing relationship either with the high‐type customers only or with all customers. Yet, in this case, equity‐based payment claims are —for rent extraction purposes— common (i.e., not differentiated) across types.