Agency Costs of Venture Capitalist Control in Startups
Jesse M. Fried
Harvard Law School; European Corporate Governance Institute (ECGI)
University of Texas at Austin - School of Law
August 15, 2005
New York University Law Review, Vol. 81, pp. 967-1025, 2006
Venture capitalists investing in U.S. startups typically receive preferred stock and extensive control rights. Various explanations for each of these arrangements have been offered. However, scholars have failed to notice that when combined these arrangements result in a highly unusual corporate governance structure: one in which preferred shareholders, not common shareholders, control the board and the firm. The purpose of this Article is threefold: (1) to highlight the unusual governance structure of these VC-backed startups; (2) to show that preferred shareholder control can give rise to potentially large agency costs, and (3) to suggest legal reforms that may help VCs and entrepreneurs reduce these agency costs and improve corporate governance in startups.
Number of Pages in PDF File: 56
Keywords: venture capital, start-ups, preferred stock, corporate governance, fiduciary duties
JEL Classification: G24, G32, G34, G38, H25, K22, M13Accepted Paper Series
Date posted: August 19, 2005 ; Last revised: June 27, 2011
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