Venture Capital and Private Equity Contracting

Chapter 2. Overview of Agency Theory

2.1. Introduction and Learning Objectives

This chapter provides an overview of the different agency problems in the context of financial contracting. The term agency cost generally refers to actions the parties to a contract might do that are in their own self-interest but are against the interest of the other party. If agency problems did not exist, then most details in financial contracts would be immaterial. Much of what venture capital and private equity funds do involves agency costs, and a central mechanism by which agency costs can be mitigated is through financial contracts. Hence, the analysis of venture capital and private equity in this book is focused on financial contracting, and in this analysis ...