An Analysis of Compensation in the Us Venture Capital Partnership

Harvard Business School Working Paper No 95- 009

Posted: 12 Feb 1999

See all articles by Paul A. Gompers

Paul A. Gompers

Harvard Business School - Finance Unit; Harvard University - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Josh Lerner

Harvard Business School - Finance Unit; Harvard University - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER)

Date Written: August 1994

Abstract

In this paper, we analyze the structure of compensation in US venture capital partnerships. We contrast a learning model that extends Gibbons and Murphy (1992) to a situation in which a venture capitalist and an investor split the expected gains from investment with a signalling alternative. Empirical evidence from 419 U.S. venture capital partnerships formed between January 1978 and December 1992 is generally consistent with the four primary predictions of the learning model. Compensation is bunched, with 81 percent of the sample funds sharing between 20 and 21 percent of the profit. The compensation of new and smaller funds shows considerably less variation than older and larger funds. Compensation of older and larger funds is significantly more sensitive to performance than compensation of newer and smaller funds. Finally, funds that focus on early-stage and high-technology investments have higher base compensation, consistent with the greater effort required to monitor these projects.

JEL Classification: G23

Suggested Citation

Gompers, Paul A. and Lerner, Josh, An Analysis of Compensation in the Us Venture Capital Partnership (August 1994). Harvard Business School Working Paper No 95- 009. Available at SSRN: https://ssrn.com/abstract=5521

Paul A. Gompers

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6297 (Phone)
617-496-8443 (Fax)

Harvard University - Entrepreneurial Management Unit ( email )

Cambridge, MA 02163
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Josh Lerner (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6065 (Phone)
617-496-7357 (Fax)

HOME PAGE: http://www.people.hbs.edu/jlerner/

Harvard University - Entrepreneurial Management Unit

Cambridge, MA 02163
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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