Why moral hazard matters to a first-time founder
Incentives change when one party receives the upside while another bears much of the downside. Founders can create this problem through uncapped expense policies, poorly designed bonuses or guarantees. Clear accountability and shared consequences reduce wasteful or reckless decisions.
Examples of moral hazard
A sales manager earns a bonus for signed annual contracts but loses nothing when customers cancel after one month. They promise unsuitable features to close $100,000 of deals, leaving the company to absorb refunds and reputational damage after the bonus is paid.
Common misunderstanding
The term does not accuse someone of being immoral. It describes an incentive problem created by uneven exposure to consequences. It also differs from adverse selection, which concerns hidden information before an agreement rather than changed behaviour after protection is in place.
When to use it
Use it when designing insurance, guarantees, lending, bonuses or delegated authority. Ask who gains from a risky choice, who pays if it fails and who can observe behaviour. Add sensible limits, monitoring or shared exposure without making useful action impossible.