3. Fund Formation: Structural and Operational Deformations in Venture Capital

Venture capital fund structures are complex, where management of venture capital partnerships is vested in GPs. Corporate governance structures in venture capital funds may be likely to fail in a variety of areas; as a result, GPs may have abundant opportunities to exploit LPs. The key challenges relate to problems with information disclosure (i.e., weak and misleading information disclosure to LPs), poor alignment of financial incentives, and complex legal documentation (that disallows LPs effective control over GPs). Moreover, the current compensation structure in venture capital creates significant misalignment, incongruence, and conflict of interest between GPs and LPs. Lastly, venture capital firms can easily live off of fixed management fees.