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 client base 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 plans in mind, you need to answer for yourself, and potential investors, the following
questions:
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.
Suppose your company raises funds from outside lenders. What type of agency costs might occur? How might
lenders mitigate the agency costs?
What is corporate governance? List five corporate governance provisions that are internal to a firm and are
under its control.
Briefly describe the use of stock options in a compensation plan. What are some potential problems with stock
options as a form of compensation?
Briefly explain how regulatory agencies and legal systems affect corporate governance.
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