In Pursuit of Good & Gold: Data Observations of Employee Ownership & Impact Investment

56 Pages Posted: 10 Mar 2017 Last revised: 29 Jun 2017

See all articles by Christopher Geczy

Christopher Geczy

University of Pennsylvania - The Wharton School, Finance Department

Jessica Jeffers

University of Chicago - Booth School of Business

David K. Musto

University of Pennsylvania - Finance Department

Anne M. Tucker

Georgia State University College of Law

Date Written: 2017

Abstract

A startup’s path to self-sustaining profitability is risky and hard, and most do not make it. Venture capital (VC) investors try to improve these odds with contractual terms that focus and sharpen employees’ incentives to pursue gold. If the employees and investors expect the startup to balance the goal of profitability with another goal — the goal of good — the risks are likely to both grow and multiply. They grow to the extent that profits are threatened, and they multiply to the extent that balancing competing goals adds a dimension to the incentive problem. In this Article, we explore contracting terms specific to impact investing funds and their portfolio companies. We observe one possible private ordering mechanism to balance and align interests to serve both goals: employee ownership.

Traditional VC investments confront contracting challenges as the portfolio companies and investors balance their interests, which may not align. Additionally, portfolio companies are contracting with their own employees. The VC contracting literature identifies several agency costs that contractual terms can address. Contracts can help attract the right employees, then encourage them to work, stay, and share their best ideas. But, the existing literature addresses traditional agency costs with respect to the pursuit of a single monetary goal. Impact investment funds that balance monetary goals, short-term or long, with other goals may strike a different balance in negotiating with companies. We examine how the introduction of new motivations and interests into a precarious negotiation process shapes contracting outcomes.

We address this question empirically by analyzing the role of employee stock ownership in impact investment fund contracts when investing in targeted portfolio companies. That a startup’s employees might receive shares and options is uncontroversial. Indeed, this appears in many ways to be fundamental to today’s startup culture. Might impact investors mandate that employees own shares as a means to balance dual goals? That is the key question for our analysis.

Keywords: Shareholders, Impact Investors, Employee Shareholders, Employee Stock Ownership, Venture Capital, Employee Ownership, Investment Funds, Startups

JEL Classification: D24, G30, J39, K12, K22, L21, K26, M13, M52

Suggested Citation

Geczy, Christopher Charles and Jeffers, Jessica and Musto, David K. and Tucker, Anne M., In Pursuit of Good & Gold: Data Observations of Employee Ownership & Impact Investment (2017). Seattle University Law Review, Vol. 40, No. 2, 2017, Georgia State University College of Law, Legal Studies Research Paper No. 2017-10, Available at SSRN: https://ssrn.com/abstract=2929686

Christopher Charles Geczy

University of Pennsylvania - The Wharton School, Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
(215) 898-1698 (Phone)
(215) 898-6200 (Fax)

Jessica Jeffers

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

David K. Musto

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Anne M. Tucker (Contact Author)

Georgia State University College of Law ( email )

P.O. Box 4037
Atlanta, GA 30302-4037
United States
(404) 413- 9179 (Phone)

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