40 Pages Posted: 19 Feb 2013 Last revised: 6 Oct 2013
Date Written: October 6, 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.
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
Suggested Citation: 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: https://ssrn.com/abstract=2221033 or http://dx.doi.org/10.2139/ssrn.2221033