Corporate governance with crowd investors in innovative entrepreneurial finance: Nominee structure and coinvestment in equity crowdfunding

Abstract

In innovative entrepreneurial finance markets, ventures raising funds target a set of heterogeneous “digital” investors using distinct governance mechanisms. We focus on the micro-functioning of equity crowdfunding (ECF) markets by investigating the differences in terms of agency issues and potential principal-principal conflicts arising from the coinvestment of angels or venture capitalists alongside crowd investors. The nominee governance structure, by allocating the same ownership and voting rights to all investors and aggregating them into a special purpose vehicle with the nominee company as sole legal owner, can reconcile such conflicts by mitigating agency and coordination problems. This structure enables angels and venture capital funds to exploit the wisdom of the crowd and crowd investors to free ride on the former’s due diligence and monitoring. Using a platform governance lens, this paper evaluates the performance of nominee versus direct ownership structure. Based a large sample of 1,103 successful and unsuccessful initial campaigns on the three largest equity crowdfunding platforms in the UK (namely Seedrs, Crowdcube, and SyndicateRoom), we document that nominee firms exhibit better short run and long run performance. Our results hold inter-platform between crowdfunding platforms as well as intra-platform, as confirmed by a quasi-natural experiment when the nominee approach became an option for startups raising capital on the Crowdcube platform. Our findings offer valuable insights to platforms and policymakers who could channel tax incentives via nominee schemes.

Keywords: Crowdfunding; Platforms; Digital finance; Innovative entrepreneurial finance.

JEL Classification: G240, M130