Because the VC industry presents high risks, it is necessary to have a framework of both explicit and implicit agreements. Both must exist at the same time. Explicit agreements rely on a country’s legal system, while implicit agreements rely on reputational markets. The interaction of the two systems creates a mechanism of checks and balances between the parties, which addresses issues regarding incentives, monitoring, information asymmetry, and agency costs.

Information asymmetry, agency costs, VC incentives, founders incentives, compensation structures, VC control

How do explicit agreements protect investors and founders?

How do implicit agreements protect investors and founders?

How are they enforced?