> since it benefits his VC firm

That's only assuming he doesn't understand the VC model, which I doubt. The extremely power-law nature of VC investments means he can get better returns if he maximizes the growth trajectory of his portfolio companies, than if he maximizes the size of his share (by billing at high rates, i.e. at the cost of potentially less steep growth). Unless he's a moron, he'll genuinely want his sweat investment to cause tremendous growth more than anything else.

I think that the incentives are aligned as much as they are with cash VC investments (i.e. closely, but not entirely, because the founder has all their eggs in a single basket and the VC doesn't). I just think he can't pull it off. :-)

I don't think the incentives (for VCs and founders) associated with cash and "services" investments are equally aligned. The main reason is not the potential for overbilling, which you mentioned, but because the VC gains a significant amount of influence over the company when the company hires the VC's close associates, which generates a conflict of interest.

But back to the billing: it is in the VC's best interest to acquire the largest possible percentage of the company at the lowest possible cost. When the VC is investing "services" instead of cash, and has control over the pricing of the services, it would be in the VC's interest to provide a smaller quantity of services in exchange for the same amount of equity, since this decreases the VC's cost of investment.

You're right that it would not make sense for the VC to make a deal that is egregious enough to choke the company's growth, since that would diminish the value of the equity, but rational VCs would not intentionally make such a deal. Also, since the services in this arrangement cost the company equity, not cash, I think overbilling would only hurt the company through opportunity costs (as the equity could have been used to obtain a better offer).

Whether it makes sense for the VC to overbill for services also depends on how much equity the VC owns. Most of my above comments operate under the assumption that the VC owns a small percentage of the company.

> Also, since the services in this arrangement cost the company equity, not cash, I think overbilling would only hurt the company through opportunity costs (as the equity could have been used to obtain a better offer).

This is a good point that I had not considered yet. Thanks, I agree.

VCs want a chunk of that growth. Giving a startup you don't own 30% annual growth in exchange for a fixed salary doesn't look like a good deal.