Open Access. Powered by Scholars. Published by Universities.®

Law Commons

Open Access. Powered by Scholars. Published by Universities.®

Series

Incomplete contracting

Law and Economics

Maurer School of Law: Indiana University

Articles 1 - 1 of 1

Full-Text Articles in Law

Independent Directors And Shared Board Control In Venture Finance, Brian J. Broughman Jan 2013

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 ...