Are venture investors' incentives structurally aligned with founders' interests?

Akin Babayigit · Jun 26, 2023

The biggest misalignment between founders and VCs is time horizon and liquidity needs, which surfaces when things go exceptionally well or exceptionally badly

Very few VCs are genuinely long-term holders because their business requires exiting, while backing a truly exceptional founder calls for being long-term greedy rather than short-term greedy

Scope: acknowledges the exit horizon is legitimately part of the VC business model

61:09 20VC: Eight Pieces of Startup Advice that are BS: Why You Do Not Have to Love Your Space, It Is Ok To Do It For The Money, Focus Is Not Everything, Speed Is Not The Most Important Thing with Akin Babayigit, Co-Founder @ Tripledot Studios

Shu Nyatta · Jul 31, 2023

Founders and VCs are frequently misaligned at the early stage because the VC's goal is a markup that supports raising the next fund, not building a lasting company

Early-stage investors want the A priced meaningfully below the B so they can raise a new fund on the back of the B or C, which is a different objective from the founder's

Scope: specific to early stage

12:40 20VC: Marcelo Claure & Shu Nyatta on Lessons from Investing $7.5BN at Softbank & Why Dumb Money has Gone, Why "LATAM is Under Construction" and the Next 10 Years Will Be the Best & Investing Lessons from Missing Nubank & OpenAI & Investing in FTX

Harry Stebbings · Sep 27, 2023

There is a structural misalignment between founders and VCs, because VCs need their capital returned with a multiple on a timeline that may not suit the founder

The VC must get cash back and more than they gave, and the moment they need it won't always suit the company

28:13 20VC: "How Being a Founder Almost Killed Me"; We Have Lied to a Generation of Founders | The Hardest Truths About Being a Founder Revealed | Why AI Co-Pilot is BS, Seat Pricing is Over & User Interfaces are Stupid with Christian Lanng

Davis Smith · Dec 15, 2023

There is a genuine structural misalignment between purpose-driven founders building for decades and venture investors needing liquidity, and he doesn't yet have an answer to it

His later investors were asking how to get out and create a return while he wanted to build a brand beholden to its mission rather than to an investor

Scope: concedes both sides ultimately want growth; says he doesn't know the answer yet

22:37 20VC: Cotopaxi: From Selling $6M of Pool Tables to Scaling $150M in Revenues and Challenging Patagonia, Fundraising Lessons from 100+ Rejections & What Founders Do Not Understand About VC with Davis Smith, Founder @ Cotopaxi

Taavet Hinrikus · Apr 28, 2025

The most underdiscussed founder-investor conflict is timeline misalignment — investors wanting their money back before the founder is ready.

If a founder is committed for the next two decades, the investor's need for liquidity creates an unresolvable tension.

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Nick Chirls · Sep 6, 2024

Legal agreements between founders and investors don't matter, because there are always ways for either side to screw the other

In ten years of experience he has seen that whatever the documents say, either party can find a way around them

Scope: goes both ways — investors on founders and founders on investors

26:09 20VC: Why VC is a Ponzi Scheme Today | Why Most VCs are Bankers | Why Big VCs Ruin Startups | Why Incentives in VC are Broken | Why American Dynamism is a Tool for VCs to Raise Money with Nick Chirls, Asylum Ventures

Nick Chirls · Sep 6, 2024

What matters between founders and investors is honest, transparent communication and trust, not legal agreements or the preferred-versus-common distinction

Over a company's life there will be constant friction and disagreement; the ability to talk through it honestly and feel heard is what builds or destroys trust, and none of that is contemplated in legal documents

Scope: he is fine with not getting the best economic deal if the process was honest

27:59 20VC: Why VC is a Ponzi Scheme Today | Why Most VCs are Bankers | Why Big VCs Ruin Startups | Why Incentives in VC are Broken | Why American Dynamism is a Tool for VCs to Raise Money with Nick Chirls, Asylum Ventures

Mark Goldberg · Oct 25, 2024

Alignment with founders is about where investors put their incentives and spend their time, not about instruments like share class

Founders are asking for experienced investors who actually have time to spend with them and for something new in the ecosystem

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Nabeel Hyatt · Apr 4, 2025

The specific structure of venture terms — preferred versus common, liquidation preferences — is negotiable and he is open to it changing; what matters is that founders can build good companies and treat their investors as committed to the same cause

Venture was always an unusual lean-back model of minority passive ownership rather than PE-style control, and treating the relationship transactionally is the enemy of the work he's trying to do

Scope: conditional on the relationship not becoming purely transactional

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Harry Stebbings · May 6, 2024

Investors holding large reserves distort information flow with founders, because founders can't tell them the real story when bad news would jeopardize follow-on capital

A founder told him privately that the numbers were bad but he couldn't say so to multi-stage funds on the board because he needed their reserves

Scope: based on a single recent founder conversation

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Harry Stebbings · Sep 6, 2024

Multi-stage or heavy-reserve venture models create an under-discussed misalignment: founders are not incentivized to tell their existing investor how bad things really are

The founder wants the follow-on check and wants that investor to lead the A or B, which produces imperfect information

41:43 20VC: Why VC is a Ponzi Scheme Today | Why Most VCs are Bankers | Why Big VCs Ruin Startups | Why Incentives in VC are Broken | Why American Dynamism is a Tool for VCs to Raise Money with Nick Chirls, Asylum Ventures

Shervin Pishevar · Jan 13, 2025

Benchmark and the other investors made a critical mistake by protecting single-digit-billion gains instead of standing by their founder, forgoing roughly $100B for their LPs

Investors who stuck by strong-personality founders like Elon at Tesla and SpaceX are now reaping enormous returns; a 10% Uber stake in a trillion-dollar company would have been worth $100B

Scope: assumes Uber would have reached a trillion-dollar valuation

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Philipp Freise · Jun 30, 2025

The choice of investors is one of the most consequential decisions a founder makes: long-term business builders hold on when things go wrong, while fast-buck, financially oriented early-stage VCs drop founders in a crisis

As a 26-year-old founder he spent all his time mediating between board investors who wanted a quick IPO/turnaround and corporates who wanted a permanent innovation window

Scope: framed from the founder's perspective

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Harry Stebbings · Feb 11, 2020

There is a structural risk misalignment between VCs and founders: a $50-100M exit is a hugely successful outcome for a founder but immaterial to a fund that needs portfolio outliers.

VCs hold a portfolio and are only compensated by outlier outcomes, so their 'go big or go home' advice is rational for them but not for the founder facing a life-changing exit.

Scope: framed as the alignment question he personally struggles with

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Harry Stebbings · Oct 12, 2020 · hedged

There is a structural misalignment when a $150M exit gives each founder $30M — life-changing for them — while barely moving the return profile of a fund in the hundreds of millions

Scope: asks George whether he is seeing it wrong

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Parker Conrad · Apr 26, 2021

Founders are structurally at a disadvantage in conflicts with investors because investors hold a diversified portfolio while the founder has only one company

An investor can credibly say they have 30 other investments and are prepared to lose this one, while the founder has no such option

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Jeff Jordan · Jan 16, 2023

The biggest misalignment between founders and VCs is that the VC has a portfolio and the founder has an n of one, which makes the VC prefer the riskier, higher-upside path

Portfolio diversification changes risk appetite; the founder bears concentrated risk and cannot diversify

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Christian Lanng · Sep 27, 2023

Founders should learn the mechanics of waterfalls and liquidation preferences and use them — including timing demands to the moment of maximum leverage — even though VCs resent founders using their own tactics

He refused to sign the last Tradeshift round until the employee option pool moved from common to pref-2 so employees wouldn't be underwater in a future transaction, and he deliberately raised it late because doing it nine months earlier would have been harder

28:23 Founders should use the same structural leverage back

Harry Stebbings · Sep 6, 2024

Pre-seed and seed investors must insist on provisions and protections, because it is a real fiduciary responsibility and founders can become ill, be replaced, or die.

Founder risk is real and outside anyone's control, and investors owe their LPs protection against it.

23:42 Fiduciary duty requires legal protections against founder specific risks like illness or death

Alex Rampell · Jan 12, 2026

The investor's ownership question and the founder's dilution question are the exact inverse of each other, and the tension between them is structural

Founders want the least dilution possible for a tier-one investor; investors want the most ownership — both would love 5% A rounds from opposite motives but the math has to work for one side

48:22 Ownership and dilution are inverse so the tension is structural

Cem Sertoglu · Nov 20, 2024

Founders systematically underestimate the leverage they have over their cap table and waste negotiation energy on obscure, far-fetched scenarios

Experienced founders know it is their company and that they will have a lot of flexibility to manage situations when they actually arise; in his own portfolio he sees how much weight the founder carries

57:37 Founders underestimate their own leverage over the cap table

David Tisch · Feb 27, 2023

Venture is a job that isn't about the investor but about the founders, and investor success is genuinely aligned with founders' success.

Watching founders they back succeed delivers both emotional/psychological and financial returns to the firm.

6:07 The job is fundamentally about founders so investor and founder success are genuinely aligned

David Tisch · Feb 27, 2023

The main founder-investor misalignment he encounters is founders being dishonest or renegotiating agreed terms, not structural conflicts of interest

He puts his word first and expects to work with people who do the same

48:39 The real misalignment is founder dishonesty or renegotiation not structural conflicts of interest

Harry Stebbings · Jun 26, 2023

Fund economics systematically skew the advice investors give founders, because an outcome that is life-changing for a founder who owns 10-20% of a $100M asset does nothing for a large fund that needs multi-billion outcomes

Investors advise aggressively toward growth and customer acquisition on the trajectory that fits their own required outcome, which differs from what benefits the founder

61:53 Fund size requirements skew investor advice toward aggressive growth

Akin Babayigit · Jun 26, 2023

If you have high conviction a founder is truly exceptional you should relieve them of the burden of your return requirements, and in return founders should understand their investor's constraints

The best investor-founder relationships he has seen are ones where both sides state their goals and constraints openly and help each other solve them

62:27 Relieving founders of return pressure when conviction is high resolves misalignment

George Zachary · Oct 12, 2020

Founder/investor outcome misalignment is inherent and won't completely go away, but it isn't bad — a $30M outcome is sometimes the logical result and nobody should be ashamed of it

The founder has one investment while the investor has a portfolio, so the same outcome means different things to each; it's a structural difference in position, not a failure

13:56 Structural position difference between portfolio investor and single outcome founder explains misalignment without it being bad

Mark Goldberg · Oct 25, 2024

There are too many VCs, but the market still has room for a genuinely new fund designed to fully align investor and founder values

The design question of what a fully aligned fund looks like led to smaller size, stage focus, and experienced investors from multi-stage platforms combining

4:35 Founder alignment requires a newly designed fund not just existing choices

Bastian Lehmann · Apr 8, 2024

The single biggest misalignment between VCs and founders is expectations — specifically about when and how things happen, not simply VCs wanting more

There is a lot of friction there in general

54:04 Misaligned expectations about timing not greed is the core vc founder friction

Terrence Rohan · Feb 5, 2024

The biggest VC-founder misalignment is structural: the product VCs sell LPs (20% ownership, board seats) is not what founders want to buy

VCs sell a very specific product to LPs that doesn't always fit founder demand

78:31 Vc product sold to lps ownership and board seats misaligns with founder wants

Adam Fisher · Jan 22, 2024

Founder-investor misalignment is minimal at early stage but real at growth stage, especially when founders take secondary liquidity.

Early on both sides are in the money together; at growth stage founders feel they've earned the right to sell after years of low salary while growth investors are stuck and only care about the future that didn't materialise.

52:35 Misalignment emerges at growth stage around secondary liquidity not at early stage

Emil Michael · Oct 24, 2022

He and Travis Kalanick were forced out of Uber because Benchmark and Bill Gurley lost their nerve, driven by loss aversion over their paper gains

A $33M investment worth $10BN inside a $500M fund creates an overwhelming instinct to protect the existing gain rather than pursue the next $10-100BN of value, so every incident felt like it would blow up the whole thing

31:10 Loss aversion over concentrated paper gains drove investors to remove founders

Harry Stebbings · Oct 24, 2022

There are unavoidable structural misalignments between founders and investors even when both parties are excellent people, contrary to the view that the best relationships have none

Fund mathematics create them — a $100M fund facing a $10BN return has a rational incentive to seek protection mechanisms that don't serve the founder

41:19 Misalignment is structural even between otherwise excellent people

Emil Michael · Oct 24, 2022

Early-stage board seats should carry term limits or return-based exits, e.g. an investor takes liquidity at 10x and steps off the board

Early board members sitting on late-stage companies naturally become fear-based, protecting paper gains rather than doing what the company needs to grow the next 10x — a natural, not malicious, misalignment

41:48 Term limits or return based exits fix structural misalignment of early investors on late stage boards

Harry Stebbings · Oct 24, 2022

Early-stage investors are the most difficult people for later-stage investors to deal with because they want to protect their golden goose rather than pursue further upside

Once a tier-one brand is in, the early investor treats the company as their special win and becomes protective

42:40 Early investors protect their golden goose rather than pursue further upside making them hardest to work with