3 . Individual Problems 21-5Venture capital (VC) firms are pools of private capital that typically invest in small, fast-growing companies that can't raise funds through other means. In exchange for t

3 . Individual Problems 21-5Venture capital (VC) firms are pools of private capital that typically invest in small, fast-growing companies that can't raise funds through other means. In exchange for this financing, VCs receive a share of a company's equity, and the founders of the firm typically stay on and continue to manage the company.

The incentive conflict is between the managers, who are the  principals or agents  , and venture capitalists, who are the  principals or agents   .VC investments have two typical components: (1) managers maintain some ownership in the company and often earn additional equity if the company performs well; (2) VCs demand seats on the company's board.

Management ownership serves to  increase or decrease  the alignment of the incentives of managers with the incentives of owners.