The Wall Street Journal reports that medical device startups are struggling to o

Question

The Wall Street Journal reports that medical device startups are struggling to obtain financing.
As a result,

[E]ntrepreneurs and their financial backers are approaching potential acquirers much earlier than
in the past. Some firms are striking funding deals with larger established companies, often in
exchange for board seats and future acquisition rights.

The upside is reliable financing and industry expertise. But such deals can curb the start-up's upside
potential if it finds success and becomes an acquisition target: The device firm can't seek multiple
bidders and run up its acquisition price.
Charlie Attlan, vice president of corporate business development at Boston Scientific Corp. said his
company is looking to tie up with startups much earlier than in the past. "We might have an
earlier-stage collaboration, and they give up the hope of a home run if and when we acquire them,"
he said...
One such arrangement culminated this month with St. Jude Medical Inc.'s purchase of startup
Nanostim for up to $188.5 million in cash, a price set in a 2011 agreement.
St. Jude's investment financed the bulk of the $40 million to $50 million in costs needed to win
European approval for Nanostim's minimally invasive pacemaker, according to Allan May, former
chairman at Sunnyvale, Calif.-based Nanostim and a managing director at Emergent Medical
Partners. In exchange, St. Jude gained rights to purchase Nanostim within 90 days of regulatory
approval.
Had venture investment not been cratering in 2011, Mr. May said, Nanostim probably would have
sought a more traditional financing deal that would have kept the door open for a higher takeout
price in the future.
"Is that the best deal in the world? No," said Mr. May. "You're trading away some potential
upside for certainty."

Do you think the new funding mechanism—selling future acquisition rights—might
lead to a moral hazard? If so, would the moral hazard take the form of too much
risk, not enough risk, or shirking?

Explanation / Answer

As far as the given case is concerned, we can infer that selling future acquisition rights will definitely lead to moral hazard. Its not easy to start a business, it needs a lot of courage, time, back work, manpower and most of all money. No body will start a business with a mind set to sell it. Its due to financial crisis or necessity that the businesses take this decision. By selling future acquisition rights, thrle company will lose its original identity and be forced to adapt to a new working culture and climate which not all employees will be happy with. Hence this will certainly lead to moral hazard.

The moral hazard witll take the form of taking too much risk. Since nobody can predict as to how the business would progress in the coming days. Hence there is too much risk involved in it.

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