The Venture Corporation

Abstract

Tech startups’ business model and business structuring are in an inevitable conflict. Startups are typically short-term and exit-bound ventures, and their shareholders care deeply about the exit strategy they will pursue. Startup shareholders, however, have varying investment strategies and liquidity needs. To ensure their ability to collaborate in spite of potential exit-related conflicts, they create governance structures that allocate among them the power to veto or force an exit on others if necessary. At the same time, though, startup shareholders also choose to form their ventures as corporations – which is surprisingly counterproductive to their efforts to maintain control over the exit strategy. Corporate law requires shareholders to entrust most exit-related powers to the board of directors. The board, in turn, is required to exercise its discretion in a way that would serve shareholders’ collective interest, disregarding particular shareholders strategies or liquidity needs. This tension makes startups’ agreed-upon governance structures unreliable and difficult to enforce. Currently available solutions, whether based on sophisticated contracting or using alternative business entities, prove inadequate in resolving this fundamental clash. Instead, this paper calls policymakers to introduce the “venture corporation,” a new business entity designed to answer startups’ unique business structuring needs.