Common Ownership and Startup Growth

Abstract

Many startups are commonly-held by the same venture capital (VC) investors. We exploit the staggered introduction of liability exemptions when investors hold stakes in conflicting business opportunities as a shock to common ownership. We find increases in common ownership and directors serving on rivals' boards after the law changes. Despite the potential for rent-extraction, commonly-held startups benefit by raising more capital through more investment rounds. Moreover, they are less likely to fail and exit more successfully. Specifically, common ownership is associated with a higher rate of acquisitions by another commonly-held startup, a higher rate of IPOs and larger IPO valuations.

Keywords: Entrepreneurship, Startups, Private Firms, Corporate Governance, Common Ownership, Fiduciary Duty, Duty of Loyalty, Conflict of Interest, Corporate Opportunity Waivers, Board of Directors, Initial Public Offerings (IPOs), Venture Capital, Raising Capital

JEL Classification: G32, G24, G28