Independent Directors and Shared Board Control in Venture Finance

40 Pages Posted: 8 May 2008 Last revised: 7 Apr 2012

See all articles by Brian J. Broughman

Brian J. Broughman

Indiana University Maurer School of Law

Date Written: April 6, 2012


In most VC-backed firms neither the entrepreneurs nor the VC 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 explanation for this practice. Using a bargaining game similar to final offer arbitration, I show that an independent director as tie-breaker 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 understanding of governance arrangements in startup firms.

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

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

Suggested Citation

Broughman, Brian J., Independent Directors and Shared Board Control in Venture Finance (April 6, 2012). Indiana Legal Studies Research Paper No. 1123840. Available at SSRN: or

Brian J. Broughman (Contact Author)

Indiana University Maurer School of Law ( email )

211 S. Indiana Avenue
Bloomington, IN 47405
United States

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