Managing Uncertainty through Profit Sharing Contracts from Medieval Italy to Silicon Valley

Organizational innovation is essential to economic development. But, the way successful societies have organized new ventures has been remarkably similar in both past and present. The commenda organizations of medieval Italy shared many characteristics with modern startups that are financed by venture capital. Profit share contracts; limited liability and periodic reevaluations are cases in point. Agency contracts in both types of ventures are designed to absorb the high uncertainty inherent to these enterprises through risk sharing. Uncertainty prohibits a unique ex ante ranking order of investment projects and prompts investors to look for hidden human capital. Equity finance is better equipped to even out unexpected losses and gains that are inherent to uncertainty than debt finance. Copyright Springer 2005