The impact of contracts on trust in entrepreneur–venture capitalist relationships.

Venture capitalists (VCs) increasingly rely on elaborate formal contracts and incentivization through share ownership to manage their relationships with the entrepreneurial firms in which they invest. This study analyses the impact of a high degree of such ‘neoclassical contracting’ on entrepreneurs’ trust in their VC backers. The results from a sample of 86 Dutch entrepreneurial firms indicate not only that a high degree of neoclassical contracting tends to erode entrepreneurs’ trust in their VCs, but also that the use of more informal, relational contracting fails to moderate the negative association between a strong focus on neoclassical contracts and trust. However, entrepreneurs do welcome some level of monitoring, which highlights the enduring tension between trust and control, and the need for VCs to strike a productive balance