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Agency Costs of Venture Capitalist Control in Startups

56 Pages Posted: 19 Aug 2005 Last revised: 27 Jun 2011

Jesse M. Fried

Harvard Law School; European Corporate Governance Institute (ECGI)

Mira Ganor

University of Texas at Austin - School of Law

Date Written: August 15, 2005

Abstract

Venture capitalists investing in U.S. startups typically receive preferred stock and extensive control rights. Various explanations for each of these arrangements have been offered. However, scholars have failed to notice that when combined these arrangements result in a highly unusual corporate governance structure: one in which preferred shareholders, not common shareholders, control the board and the firm. The purpose of this Article is threefold: (1) to highlight the unusual governance structure of these VC-backed startups; (2) to show that preferred shareholder control can give rise to potentially large agency costs, and (3) to suggest legal reforms that may help VCs and entrepreneurs reduce these agency costs and improve corporate governance in startups.

Keywords: venture capital, start-ups, preferred stock, corporate governance, fiduciary duties

JEL Classification: G24, G32, G34, G38, H25, K22, M13

Suggested Citation

Fried, Jesse M. and Ganor, Mira, Agency Costs of Venture Capitalist Control in Startups (August 15, 2005). New York University Law Review, Vol. 81, pp. 967-1025, 2006. Available at SSRN: https://ssrn.com/abstract=784610

Jesse M. Fried (Contact Author)

Harvard Law School ( email )

1575 Massachusetts
Griswold Hall 506
Cambridge, MA 02138
United States
617-384-8158 (Phone)

HOME PAGE: http://www.law.harvard.edu/faculty/directory/10289/Fried

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Mira Ganor

University of Texas at Austin - School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States

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