Strategy & Portfolio
Moral Hazard
The risk that someone will take greater risks because they don't bear the full consequences of their actions.
In venture capital, moral hazard arises when the incentive structure encourages excessive risk-taking. A founder playing with investor money may take bigger bets than they would with their own capital. A GP collecting management fees regardless of performance may not be fully motivated to maximize returns.
In Practice
The founder raised $50M but only owned 15% of the company. With limited personal downside, they pursued a risky pivot that had a 10% chance of a 100x outcome but a 90% chance of losing everything — rational for the founder's expected value, destructive for most shareholders.
Why It Matters
Moral hazard is a fundamental tension in venture capital. Well-designed incentive structures (vesting, cliffs, carry mechanics) aim to align behavior with outcomes.
VC Beast Take
Moral hazard is why VCs care about founder ownership. A founder with nothing to lose makes very different decisions than one with their net worth on the line.
Related Concepts
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