Performance hurdles in venture capital fund compensation

Jianwei Dong, Yuan-Teng Hsu, Guoping Shi and Siyuan Tan

International Review of Financial Analysis, 2025, vol. 102, issue C

Abstract: The existing research provides limited insights into the compensation incentives of limited partnerships, particularly regarding performance hurdles. This study investigates how performance hurdles affect the appointment of venture capital (VC) directors to portfolio company boards. Utilizing mandatory disclosure data from Chinese listed companies acting as limited partners in VC funds, we construct a unique dataset of managerial incentive schemes covering 104 VC funds. Our findings reveal that higher performance hurdles significantly increase the likelihood of VC firms appointing directors to portfolio companies. This effect is more pronounced when VC funds invest in geographically proximate portfolio companies and when the company's CEO concurrently serves as a board chair (CEO duality). Moreover, by appointing VC directors, higher performance hurdles foster innovation and enhance the likelihood of successful initial public offerings for portfolio companies. These results highlight the pivotal role of performance hurdles in driving portfolio company growth by incentivizing greater engagement from VC fund managers.

Keywords: Venture capital; Performance hurdles; Board seats; Geographic proximity; CEO duality; Firm growth (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:102:y:2025:i:c:s1057521925001024

DOI: 10.1016/j.irfa.2025.104015

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