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.

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?