Consulting for equity

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The advent of the New Economy introduced a new compensation scheme to the consulting business: Consulting for Equity. By serving new kinds of clients such as high-tech start-ups, which are prospect-rich but earn poor cash-flows, consultants started to share in the business risk of entrepreneurs. While there was great enthusiasm within many consulting firms to participate in the dynamic development of entirely new industries, the new role of consultants as shareholders of their client firms may incur substantial changes in the incentive structure of both the client and the consultant. Accordingly, in applying the principal-agent framework, this dissertation analyzes whether the application of Consulting for Equity enhances the client-consultant relationship by aligning the interests of the client and the consultant. In our theoretical analyses we show that Consulting for Equity can, at least under certain circumstances, improve the client-consultant relationship because it may reduce incentive problems that prevail in fixed or hourly fee arrangements. Moreover, it may also render risk sharing between the client and the consultant more efficient. In order to complement our theoretical results, we present explorative empirical evidence regarding the outreach and the basic features of Consulting for Equity in the German consulting market. Our results also highlight problems of applying Consulting for Equity in practice.