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Venture and agency issues

Today I’m thinking about the issue of agency conflict. Right now, I’m working with a few clients who are pursuing venture funding. Without being critical, it has been very interesting to see how universally appealing the idea of playing with other peoples’ money is.
Cash inflows from outside investors certainly allow ventures to ramp up more quickly, and take away much of the pain and frustration of a gradual bootstrapping. However, real agency costs exist, as the company is charged with spending that money in a way that will most benefit the enterprise and secure the greatest return for all shareholders. As such, it is important that the employees and stakeholders of the company are shareholders, with a claim on the future stream of cash flow. Otherwise, the logical mode of behavior is to evaluate a startup as a temporary mealticket.
But then we see a collective action problem for Venture Capitalists during successive rounds of funding: how do you claim ample enough share of the company in return for your investment, while keeping the executives and employees vested enough in the venture that they will make smart, forward-looking decisions.
It is all too easy to turn a company into a cash machine, especially when things head south. Venture is too far removed from day-to-day operations and should ensure that the rank-and-file are adequately incented to do good.