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

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  • Bhanot, Karan
  • Kadapakkam, Palani-Rajan

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.

Suggested Citation

  • Bhanot, Karan & Kadapakkam, Palani-Rajan, 2022. "Pay for performance, partnership success, and the internal organization of venture capital firms," Journal of Corporate Finance, Elsevier, vol. 75(C).
    • Handle: RePEc:eee:corfin:v:75:y:2022:i:c:s092911992200089x
    DOI: 10.1016/j.jcorpfin.2022.102246
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    More about this item

    Keywords

    Venture capital; Staged financing; Partner incentives;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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