IDEAS home Printed from https://ideas.repec.org/p/ecm/feam04/524.html
   My bibliography  Save this paper

Compensation of venture capitalists with two principals

Author

Listed:
  • Sung Hyun Kim

Abstract

Venture capitalists enjoy incentive-laden compensation schemes where they are paid a fixed amount (management fees) plus a share of profit (success fees). This scheme is of course intended to provide venture capitalists with strong incentives under the heavy information asymmetry (Sahlman, 1982, J. Financial Economics) In this paper, we consider how to design a proper compensation scheme for a venture capitalist with two principals. More concretely, not only our venture capitalist is compensated from a limited partnership fund (via the abovementioned scheme) but also receives salary and bonus from shareholders of VC firm. This complicates the incentive structure and especially puts outside investors (limited partners) at risk. Our model in fact reflects reality of venture capital market in Korea, and also may be applicable generally when a venture capitalist is himself an active investor or an employee of a VC firm (e.g. corporate VC). In a related work, we have already found some limited empirical evidence that Korean venture capitalists behave differently according to the source of money (i.e. whether shareholders' or limited partners'). (Kim et al, 2003, Korea J. of Finance) This paper will consider how LP fund compensation schemes should be designed in order to prevent moral hazard in such a situation.

Suggested Citation

  • Sung Hyun Kim, 2004. "Compensation of venture capitalists with two principals," Econometric Society 2004 Far Eastern Meetings 524, Econometric Society.
  • Handle: RePEc:ecm:feam04:524
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    More about this item

    Keywords

    organization; incentives; venture capital;

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecm:feam04:524. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/essssea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.