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Carrots and Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups

Brian J. Broughman

Indiana University Maurer School of Law

Jesse M. Fried

Harvard Law School; European Corporate Governance Institute (ECGI)

October 6, 2013

98 Cornell L. Review 1319-1357 (2013)

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.

Number of Pages in PDF File: 40

Keywords: venture capital, startups, preferred shareholders, common shareholders, corporate governance, entrepreneurs, founders, mergers, trade sales, carve-outs, vote-buying, opportunism, liquidation preferences

JEL Classification: G24, G32, G34, K12, K20, K22, M13

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Date posted: February 19, 2013 ; Last revised: October 6, 2013

Suggested Citation

Broughman, Brian J. and Fried, Jesse M., Carrots and Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups (October 6, 2013). 98 Cornell L. Review 1319-1357 (2013). Available at SSRN: http://ssrn.com/abstract=2221033 or http://dx.doi.org/10.2139/ssrn.2221033

Contact Information

Brian J. Broughman
Indiana University Maurer School of Law ( email )
211 S. Indiana Avenue
Bloomington, IN 47405
United States
Jesse M. Fried (Contact Author)
Harvard Law School ( email )
1575 Massachusetts
Griswold Hall 506
Cambridge, MA 02138
United States
617-384-8158 (Phone)
HOME PAGE: http://www.law.harvard.edu/faculty/directory/10289/Fried
European Corporate Governance Institute (ECGI) ( email )
B-1050 Brussels
Feedback to SSRN

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