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

38 Pages Posted: 19 Feb 2013 Last revised: 15 Oct 2020

See all articles by Brian J. Broughman

Brian J. Broughman

Vanderbilt University Law School

Jesse M. Fried

Harvard Law School; European Corporate Governance Institute (ECGI)

Date Written: August 22, 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

Broughman, Brian J. and Fried, Jesse M., Carrots and Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups (August 22, 2013). Cornell Law Review, Forthcoming, Available at SSRN: or

Brian J. Broughman

Vanderbilt University Law School ( email )

131 21st Avenue South
Nashville, TN 37203-1181
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)


European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

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