Outside Directors at Early-Stage Startups
45 Pages Posted: 31 Jan 2019
Date Written: January 21, 2019
We use unique hand-collected data to understand why early-stage startups appoint outside directors, the type of outside directors they appoint, and the consequent effects on their future performance. Early-stage startups with better performance and less severe agency conflicts with their investors are more likely to appoint outside directors. An individual is more likely to be appointed to this role if he has invested in that startup, shares a past professional connection with the startup's founder or investors, has past entrepreneurial or board experience, and whose experience complements that of the founder. A start-up is more likely to attract future directors and future investors that share a past professional connection with the early-stage outside director. Early-stage startups with outside directors raise larger amounts in later-stage rounds, are more likely to attract VC funding, file more patents, and are more likely to exit successfully, especially through IPOs than similar startups without outside directors. Interestingly, startups whose early-stage investors serve as directors take longer to exit, are more likely to exit via acquisition rather than IPO, and file fewer patents than similar startups with non-investor directors.
Keywords: Board of Directors, Startups
JEL Classification: G24, G34, L26, M13
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