Pay for performance, partnership success, and the internal organization of venture capital firms

Karan Bhanot and Palani-Rajan Kadapakkam

Journal of Corporate Finance, 2022, vol. 75, issue C

Abstract: We show how the structure of partner incentives and decision processes within a venture capital firm contribute to fund performance and partnership success. Optimal capital allocation during staged financing requires that partner incentives encourage cooperation by linking a partner's compensation to the return on the entire fund rather than return on the investment sponsored by an individual partner. Incentives for individual performance are optimally provisioned by a higher profit share in a subsequent fund. Our paper provides an economic underpinning to empirical observations about partner pay and the internal organization of venture capital firms.

Keywords: Venture capital; Staged financing; Partner incentives (search for similar items in EconPapers)
JEL-codes: G23 G24 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:75:y:2022:i:c:s092911992200089x

DOI: 10.1016/j.jcorpfin.2022.102246

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