Skip to main content
Open Access Publications from the University of California

Common Shareholder Vulnerability in Venture-Backed Startups

  • Author(s): Ganor, Mira
  • Fried, Jesse M.
  • et al.

The capital structure and governance of venture-backed startups have received significant attention from economists and legal academics. Much of this literature has focused on venture capitalists' use of preferred stock and control rights - including board control- to reduce agency costs. Recently, it has also been suggested that VC's use of preferred stock is tax-driven. However, scholars have failed to notice that these arrangements, whatever their explanation, lead to a highly unusual and perhaps unique corporate governance structure: one in which preferred shareholders, not common shareholders, control the board and the corporation. The purpose of this paper is threefold: (1) to highlight the unusual governance structure of venture-backed startups; (2) to show that this structure leaves common shareholders vulnerable to opportunistic behavior by preferred-holding VC's expecially under current corporate law doctrines; and (3) to consider changes in these doctrines and the tax laws that would reduce common shareholder vulnerability and enlarge the startup pie for all its investors.

Main Content
Current View