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Independent Directors and Board Control in Venture Finance

Brian J. Broughman
Indiana University-Bloomington, Maurer School of Law


September 23, 2008


Abstract:     
The financial contracting literature treats control as an indivisible right held either by a firm's entrepreneurs or by its investors. In contrast, data from VC-backed firms shows that board control is typically shared, with a third-party independent director holding the tie-breaking board seat ('ID-arbitration'). In this article I use a bargaining game similar to final offer arbitration to model a firm's choice of action under ID-arbitration. I show that ID-arbitration can reduce holdup by moderating each party's ex post threat position. Consequently, ID-arbitration can lead to the efficient outcome in circumstances where alternative governance arrangements - entrepreneur control, investor control, or state-contingent control - are either unavailable or likely to lead to suboptimal results.

Keywords: Venture capital, control rights, incomplete contracting, corporate governance, board of directors

JEL Classifications: G24, G32, G34. K12, K22, M13

Working Paper Series

Date posted: May 08, 2008 ; Last revised: October 01, 2008

Suggested Citation

Broughman, Brian J., Independent Directors and Board Control in Venture Finance (September 23, 2008). Available at SSRN: http://ssrn.com/abstract=1123840


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Contact Information

Brian J. Broughman (Contact Author)
Indiana University-Bloomington, Maurer School of Law ( email )
211 S. Indiana Avenue
Bloomington, IN 47405
United States
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