Compensation contracts can be written that align the incentives of managers and investors. Incentive compensation can be in the form of cash, stock, or options. Performance can be tied to several measures and compared to various benchmarks. Carefully designed incentive schemes can avert destructive behavior. The second set of activities of private equity investors relate to the strategic control of the firm.
Monitoring is a critical role.
Both parties must ensure that proper actions are taken and that appropriate progress is being made. Critical control mechanisms e.g., active and qualified boards of directors, the right to approve important decisions, and the ability to fire and recruit key managers need to be effectively allocated in any relationship between an entrepreneur and investors. Private equity investors can also encourage firms to alter the nature of their assets and thus obtain greater financial flexibility. Patents, trademarks, and copyrights are all mechanisms to protect firm assets. Understanding the advantages and limitations of various forms of intellectual property protection, and coordinating financial and intellectual property strategies are essential to ensuring a young firm s growth.