3 . Individual Problems 21-5 Venture capital (VC) firms are pools of private capital that typically invest in small, fast-growing companies that can’t raise funds through other means. In exchange for

3 . Individual Problems 21-5
Venture capital (VC) firms are pools of private capital that typically invest in small, fast-growing companies that can’t raise funds through other means. In exchange for this financing, VCs receive a share of a company’s equity, and the founders of the firm typically stay on and continue to manage the company.
Incentive conflict is likely to characterize the relationship between venture capitalists, who act as the
principals or agents
, and the managers, who act as the
.
VC investments have two typical components: (1) managers maintain some ownership in the company and often earn additional equity if the company performs well; (2) VCs demand seats on the company’s board.
Management ownership serves to
decrease or increase
the alignment of the incentives of managers with the incentives of owners.