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Abstract. This paper provides a framework for understanding the relation between investor’s involvement and the financial claims used to finance the establishment of the organization. Using a state space representation agency model with moral hazard to derive optimal contracts for passive investors, involved investors, and acquirers. The main results are that passive investors use debt, involved investors use convertible securities and acquirers use cash or option contracts. Also studying how entrepreneurs choose among these three types of investors depending on the characteristics of their needs. The results is that entrepreneurs with small safe projects get financing mostly via passive investors using debt contracts. Entrepreneurs with large, risky projects obtain financing usually via involved investors using convertible securities. And finally entrepreneurs in industries with weak property rights protection most obtain financing via acquires using cash or call options.