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 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.

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter8: Market Failure

Section: Chapter Questions

Problem 9P

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