The more tacit and hard to describe a firm s capabilities, the greater the preference for equity involvement.

Question

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If a firm's capabilities are hard to describe and rely on tacit knowledge, it may be difficult for potential investors to assess their value. In such cases, equity involvement may be preferred as it allows investors to share in the potential upside of the firm's capabilities, rather than relying solely on contractual agreements or other forms of investment. Tacit capabilities refer to knowledge, skills, and abilities that are difficult to codify or communicate. These types of capabilities are often unique and difficult to replicate, making them valuable to investors. Therefore, equity involvement is often preferred when dealing with firms that possess such capabilities.

The More Tacit and Hard to Describe a Firm S