Sex & Startups

Abstract

Venture capital is widely perceived to have a gender problem. Both founders seeking capital and the investors themselves are overwhelmingly male, fomenting concerns about how—and how fairly—the VC sector distributes its economic gains. Although gender disparities in funding are well documented, we still know little about whether the governance of VC-backed startups similarly manifests gender imbalances. This knowledge gap is critical, since VC investments often carry strings attached, in the form of cash flow and control rights that can vary substantially from deal to deal.

This study unveils a first-of-its-kind dataset that offers detailed insights into the governance of VC-backed startups. Our data contain granular information on both cash flow and control rights within startups over a span of nearly two decades. Most significantly, our data permit one to interrogate whether a founder’s gender predicts distinct governance patterns in relation to their VC investors.
Our analysis yields several intriguing findings. First, with the help of machine learning techniques, we uncover persistent, gender-specific patterns in the linguistic architecture of startup governance documents. Digging deeper into the substantive governance provisions themselves, we show that female founders encounter a mix of advantages and disadvantages. For instance, they tend to face relatively unfavorable conditions in dividend policies and board representation, but more favorable treatment in profit participation and veto rights. On balance, however, our analysis reveals no systematic pattern of gender disparities in either direction, a surprising result in the light of our linguistic findings, and one that confounds theoretical predictions about how gender bias plausibly affects firm governance. Ultimately, our analysis reveals a complicated landscape: While female founders encounter linguistically distinct governance structures, those differences do not appear systematically to exacerbate the challenges women founders face at the initial funding stage. By the same token, startup governance also does not appear to counteract gendered funding disparities, either.

Keywords: Venture Capital, Corporate Governance, Corporate Finance, Law and Finance, Contract Design

JEL Classification: K00, K12, K22, G30, G32, G35