When voting structure and economics stop matching

What this check compares

This check reads how the investment committee votes against how economic rights are distributed among the partners. It is asking one question: does decision authority line up with economic participation.

The two are usually negotiated in separate conversations. Voting structure gets decided as a matter of how the firm wants to make decisions, and economic rights get decided as a matter of what the founding partners agreed and what later joiners were offered. Neither conversation naturally raises the other, which is how a firm ends up with a combination nobody would have chosen deliberately.

Why it is worth checking

The uncomfortable combination is concentrated decision authority sitting alongside fully equal economics. A conviction model places the call with one partner. If every partner carries identical economics, then partners who had no decision weight on a deal still bear the full economic consequence of it. That arrangement can hold for a while between people who trust each other, and it tends to become visible at exactly the wrong moment, which is when a concentrated decision goes badly.

The reverse combination is easier to live with but still worth seeing. A firm with tiered economics and a consensus vote has given some partners more of the upside while giving every partner the same ability to block, which is a structure that works only as long as nobody uses it.

A question that comes up on all three IC checks

Readers ask a version of the same question on each of the three checks that read the investment committee: does the norm against funding competing companies still hold, and does the model assume it does. The honest answer is that the norm is visibly eroding, and that the model does not depend on it either way.

Charles Hudson of Precursor Ventures has argued that as venture fund sizes keep growing, the tradition of firms holding a norm, if not a stated policy, against investing in competitive companies is likely to go away, and that this is a case where the business model for large funds is at odds with what most founders want. Chris Neumann, writing up that argument, notes that smaller funds and single-stage specialists are rethinking their own approach as well.

This is a long-simmering tension rather than a new development. Hunter Walk laid out the same mechanism in 2019, observing that large firms writing early checks would eventually find they had blocked themselves out of a category, and predicting pressure on the traditional principle that a firm will not back two competing companies. Two arguments seven years apart, reaching the same conclusion, is evidence of a slow structural drift, not of a break.

What this means for these three checks is narrow. The model reads the firm's declared voting structure, its declared scope, its declared economic rights, and its partner count, and asks whether those choices fit each other. It does not read the firm's conflict policy, and it takes no position on whether a firm should hold one. A firm that has relaxed its conflict stance has changed something real about how it operates, and the model will see that only where it changes one of the structural variables above.

• VCs are Changing Their Tune on ConflictsChris NeumannQuotes Charles Hudson of Precursor Ventures on why the norm is likely to go away as fund sizes grow.
• Coming Storms: Three Reasons That VC Firms May Start Overlooking “We’re Conflicted” and Make Competing InvestmentsHunter Walk, October 2019The same argument, made seven years earlier.

What this check does not say

The check does not read the partnership agreement, the vesting schedule, or the carry split beyond the declared structure of rights. It does not say that equal economics are wrong, or that a conviction model requires tiered economics. Plenty of firms run a combination the check flags and are entirely comfortable with it, usually because the partners have an understanding the configuration cannot express. The check surfaces the structural fact and leaves the judgment where it belongs.