Venture capital (VC) firms are pools of privatecapital that typically invest in small, fast-growingcompanies, which usually can’t raise funds through other means. In exchange for this financ-ing, the VCs receive a share of the company’s equity, and the founders of the firm typically stayon and continue to manage the company.a. Describe the nature of the incentive conflictbetween VCs and the managers, identifyingthe principal and the agent. b. VC investments have two typical com-ponents: (1) managers maintain some ownership in the company and often earnadditional equity if the company performs well; (2) VCs demand seats on the compa-ny’s board. Discuss how these two compo-nents help address the incentive conflict.
Venture capital (VC) firms are pools of private
capital that typically invest in small, fast-growing
companies, which usually can’t raise funds
through other means. In exchange for this financ-
ing, the VCs receive a share of the company’s
equity, and the founders of the firm typically stay
on and continue to manage the company.
a. Describe the nature of the incentive conflict
between VCs and the managers, identifying
the principal and the agent.
b. VC investments have two typical com-
ponents: (1) managers maintain some
ownership in the company and often earn
additional equity if the company performs
well; (2) VCs demand seats on the compa-
ny’s board. Discuss how these two compo-
nents help address the incentive conflict.
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