Suppose you decide (as did Steve Jobs and Mark Zuckerberg) to start a company. Y

Question

Suppose you decide (as did Steve Jobs and Mark Zuckerberg) to start a company. Your product is a software platform that integrates a wide range of media devices, including laptop computers, desktop computers, digital video recorders, and cell phones. Your initial market is the student body at your university. Once you have established your company and set up procedures for operating it, you plan to expand to other colleges in the area and eventually to go nationwide. At some point, hopefully sooner rather than later, you plan to go public with an IPO and then to buy a yacht and take off for the South Pacific to indulge in your passion for underwater photography. With these issues in mind, you need to answer for yourself, and potential investors, the following questions.

Questions to be Answered

a..What is an agency relationship? When you first begin operations, assuming you are the only employee and only your money is invested in the business, would any agency conflicts exist? Explain your answer

b.If you expanded and hired additional people to help you, might that give rise to agency problems?

c.Suppose you need additional capital to expand and you sell some stock to outside investors. If you maintain enough stock to control the company, what type of agency conflict might occur?

d.Suppose your company raises funds from outside lenders. What type of agency costs might occur? How might lenders mitigate the agency costs?

*****No plagiarism please******

Explanation / Answer

a.An Agency relationship is another coined terminology for Business Relationship. There is a principal Body involved and an agent who cascades the rights and power to an entity or agent. That also includes the legal authorities.

Thus the transactional exchange between these two parties is an Agency relationship.For start ups, or being the soul initiator of a Business, entrepreneurs do face agency conflicts because there is no one to cascade down the deliverables to and the individual himself is the stakeholder for all the operations. In this case it is more of distributed liking and penchant for simultaneous hobbies which leads to distribution of attention.

b. Expansion and having additional resources also leads to Agency conflicts in the context of De Facto of the deliverables. The more of the number of heads, the more possibility of diversified interests other than the organizational interests. However, there is a higher chance of the conflict to lessen because if an individual at one level is not aligned to the Business, there is atleast a room for the other to take care.

c. In the scenario of additional capital and selling stock to outsiders, the probable problem that might arise is the challenge of navigation through the third party and shepherd the sale. There has to be a confusion that who is the decision maker. To be able to identify the effective Business spoc becomes a problem by the external parties.

d. Agency costs is mainly the compensation of the agent working on behalf of the principal. These increase due to various internal conflicts. When the principal is not completely in charge, that in turn increases the pricing for the lenders.Lending into multiple shares also increases the cost. This can only be mitigated if the lender disagree with the direction of management.

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