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, M13Accepted Paper Series
Date posted: February 19, 2013 ; Last revised: October 6, 2013
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