Designing incentives for venture capital financed entrepreneurs

Abstract

Although there is extensive literature on incentives schemes and their importance in the employer-employee context there is relatively little research on the subject in the milieu of venture capital-financed entrepreneurs. Nevertheless, there is growing academic research on the relationship between venture capital firms and entrepreneurs, probably due to the industry's tremendous growth in the last decade'. This paper aims to study this relationship and build a comprehensive logical framework for designing incentives for venture capital-financed entrepreneurs. In an attempt to close the gap between existing models and the business world, specifically the paper's objective is to show that, although there are many factors influencing the complex relationship between the venture capital firm and the entrepreneur, the entrepreneur exerts effort based on their future utility from the venture, while taking under consideration other factors like reciprocity, their own stake in the project, debt and other legal constraints. Finally, a case of a venture capital investment in an Israeli start-up company will be presented together with a necessary understanding of the founders' remuneration, analyzed via the framework developed in this paper.