The Law of Contingent Control in Venture Capital

29 Pages Posted: 11 May 2023 Last revised: 13 Jun 2023

See all articles by Alvaro Pereira

Alvaro Pereira

Georgia State University College of Law

Date Written: May 10, 2023


Contingent control (CC) is a key enabler of startup growth and venture capital. To preserve adequate incentives and mitigate risks, venture finance deals distribute startups’ governance rights among investors and founders based on performance measures at different points in time. For example, granting greater decision-making powers to outperforming founders or depriving them of such prerogatives when they underperform. Crucially, these rights are distributed ex ante, through carefully designed contracts and securities, avoiding the costs and potential failure of future negotiations. This paper shows how corporate law determines the structure of CC: higher costs of structuring CC through bespoke securities, such as restricted shares or convertible preferred stock, incentivize the use of shareholders’ agreements and shadow governance structures in VC-backed companies. These findings demonstrate that cross-country differences in security design and capital structures are also explained by the regulation of non-listed companies, which has been evolving in the blind spot of legal and financial scholarship. The paper argues that corporate laws in entrepreneurial economies should be recalibrated to facilitate security design and discourage the disproportionate use of shareholders’ agreements.

Keywords: Venture Capital, Shareholders’ Agreements, Preferred Stock, Conversion Rights, Contract Design, Corporate Governance, Corproate Law

JEL Classification: G30, G32, G34, O57

Suggested Citation

Pereira, Alvaro, The Law of Contingent Control in Venture Capital (May 10, 2023). forthcoming, Columbia Business Law Review, Vol. 2023, No. 2, 2023, Available at SSRN:

Alvaro Pereira (Contact Author)

Georgia State University College of Law ( email )

P.O. Box 4037
Atlanta, GA 30302-4037
United States

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