Contracts and Trust

For new ventures, formal contacts are used as a means to impose control on an environment characterized by unpredictable actors and risky interdependence. From the employment relationships of key team members to questions of how control is shared between founders and investors, contracts are used to formalize parties' expectations and undergird those expectations with the force of legal sanctions. Contracts can clarify and codify agreements, but they also provide actors with the means to enforce those agreements and punish actors' failures to live up to their agreements.

Some dimensions of new venture management will always involve contracting: Venture capital placements in a portfolio firm inevitably include some degree of formal contracting, for example. However, it is costly, slow, and complicated to encode every last expectation or ...