Cornell Law Review
venture capital, startups, preferred shareholders, common shareholders, corporate governance, entrepreneurs, founders, mergers, trade sales, carve-outs, vote-buying, opportunism, liquidation preferences
Commercial Law | Law
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 use of coercive tools (sticks) occurs, but only rarely. Our study sheds light on important but underexplored aspects of corporate governance in VC-backed startups and the venture capital ecosystem.
Brian Broughman and Jesse Fried,
Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups, 98 Cornell Law Review. 1319
Available at: https://scholarship.law.vanderbilt.edu/faculty-publications/1282