Document Type
Article
Publication Title
Review of Law and Economics
Publication Date
6-2013
Page Number
41
Keywords
venture capital, control rights, incomplete contracting, board of directors
Disciplines
Law | Law and Economics
Abstract
In most startup firms neither the entrepreneurs nor the 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 explana- tion for this practice. Using a bargaining game similar to final offer arbitration, I show that an independent director as tiebreaker 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 and improves our understand- ing of governance arrangements in startup firms.
Recommended Citation
Brian Broughman,
Independent Directors and Board Control in Venture Finance, 9 Review of Law and Economics. 41
(2013)
Available at: https://scholarship.law.vanderbilt.edu/faculty-publications/1695