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Full-Text Articles in Law
Independent Directors And Shared Board Control In Venture Finance, Brian J. Broughman
Independent Directors And Shared Board Control In Venture Finance, Brian J. Broughman
Articles by Maurer Faculty
In most VC-backed firms neither the entrepreneurs nor the VC investors control the board. Instead control is typically shared with a mutually appointed independent director holding the tie-breaking seat. Contract theory, which treats control as an indivisible right held by one party, does not have a good explanation for this practice. Using a bargaining game similar to final offer arbitration, I show that an independent director as tie-breaker can reduce holdup by moderating each party’s ex post threat position, potentially expanding the range of firms which receive external financing. This project contributes to the literature on incomplete contracting and holdup, …
Carrots And Sticks: How Vcs Induce Entrepreneurial Teams To Sell Startups, Brian J. Broughman, Jesse M. Fried
Carrots And Sticks: How Vcs Induce Entrepreneurial Teams To Sell Startups, Brian J. Broughman, Jesse M. Fried
Articles by Maurer Faculty
Venture capitalists (VCs) usually exit their investments in a startup via a trade sale. But the entrepreneurial team – the startup’s founder, other executives, and common shareholders – may resist a trade sale. Such resistance is likely to be particularly intense when the sale price is low relative to VCs’ liquidation preferences. Using a hand-collected dataset of Silicon Valley firms, we investigate how VCs overcome such resistance. We find, in our sample, that VCs give bribes (carrots) to the entrepreneurial team in 45% of trade sales; in these sales, carrots total an average of 9% of deal value. The overt …
Do Vcs Use Inside Rounds To Dilute Founders? Some Evidence From Silicon Valley, Brian Broughman, Jesse Fried
Do Vcs Use Inside Rounds To Dilute Founders? Some Evidence From Silicon Valley, Brian Broughman, Jesse Fried
Articles by Maurer Faculty
In the bank-borrower setting, a firm's existing lender may exploit its positional advantage to extract rents from the firm in subsequent financings. Analogously, a startup's existing venture capital investors (VCs) may dilute the founder through a follow-on financing from these same VCs (an “inside” round) at an artificially low valuation. Using a hand-collected dataset of Silicon Valley startup firms, we find little evidence that VCs use inside rounds to dilute founders. Instead, our findings suggest that inside rounds are generally used as “backstop financing” for startups that cannot attract new money, and these rounds are conducted at relatively high valuations …
The Role Of Independent Directors In Startup Firms, Brian Broughman
The Role Of Independent Directors In Startup Firms, Brian Broughman
Articles by Maurer Faculty
This Article develops a new theory to explain the widespread use of independent directors in the governance of startup firms. Privately held startups often assign a tie-breaking board seat to a third-party independent director. This practice cannot be explained by the existing corporate governance literature, which relies on diffuse ownership and passive investment-features unique to the publicly traded firm. To develop an alternative theory, I model a financing contract between an entrepreneur and a venture capital investor. I show that allocating a tie- breaking vote to an unbiased thirdparty can prevent opportunistic behavior that would occur ifthe firm were controlled …
Renegotiation Of Cash Flow Rights In The Sale Of Vc-Backed Firms, Brian Broughman, Jesse Fried
Renegotiation Of Cash Flow Rights In The Sale Of Vc-Backed Firms, Brian Broughman, Jesse Fried
Articles by Maurer Faculty
Incomplete contracting theory suggests that VC cash flow rights - including liquidation preferences - may be subject to renegotiation. Using a hand-collected dataset of sales of Silicon Valley firms, we find common shareholders do sometimes receive payment before VCs' liquidation preferences are satisfied. However, such deviations tend to be small. We also find that renegotiation is more likely when governance arrangements, including the firm's choice of corporate law, give common shareholders power to impede the sale. Our study provides support for incomplete contracting theory, improves understanding of VC exits, and suggests that choice of corporate law matters in private firms.
The Ifc's New Africa, Latin America, And Caribbean Fund: Its Worrisome Start, And How To Fix It, Christiana Ochoa, Patrick J. Keenan
The Ifc's New Africa, Latin America, And Caribbean Fund: Its Worrisome Start, And How To Fix It, Christiana Ochoa, Patrick J. Keenan
Articles by Maurer Faculty
In April 2010 the International Finance Corporation announced the creation of the African, Latin American, and Caribbean fund, a new co-investment vehicle funded largely with commitments from sovereign wealth and pension funds. The fund's objective was to draw on the IFC and the World Bank's strengths in emerging markets to identify and support enterprises that might not otherwise have come to the attention of large investors and thereby help strengthen the private sector and alleviate poverty in some of the world's poorest countries. Unfortunately the fund has, so far, proven a disappointment. It has invested only in large corporations that …