Economists have recognised for a long time that relationships between entrepreneurs and venture capitalists (VCs) may be subject to extreme conflicts of interest. These “moral hazard” problems can seriously impair performance and destroy value creation. Hence, contracts have been viewed as very important in attempting to mitigate these problems.

This view of the world is based on the traditional homo economicus model, in which it is assumed that people are fully rational, self-interested, unbiased maximisers of expected utility. The…

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