Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups

The Harvard Law School Forum on Corporate Governance and Financial Regulation 2013-02-27

Summary:

Editor’s Note: Jesse Fried is a Professor of Law at Harvard Law School, and Brian Broughman is an Associate Professor of Law at the Maurer School of Law at Indiana University, Bloomington.

Venture capitalists (VCs) play a significant role in the financing of high-risk, technology-based business ventures. VC exits usually take one of three forms: an initial public offering (IPO) of a portfolio company’s shares, followed by the sale of the VC’s shares into the public market; a “trade sale” of the company to another firm; or dissolution and liquidation of the company.

Of these three types of exits, IPOs have received the most scrutiny. This attention is not surprising. IPO exits tend to involve the largest and most visible VC-backed firms. And, perhaps just as importantly, the IPO process triggers public-disclosure requirements under the securities laws, making data on IPO exits easily accessible to researchers.

But trade sales are actually much more common than IPOs and, in aggregate, are more financially important to VCs. Unlike IPOs, however, trade sales do not trigger the intense public-disclosure requirements of the securities laws; they take place in the shadows. Thus, although trade sales play a critical role in the venture capital cycle, relatively little is known about them.

In our paper, Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups recently made public on SSRN, Brian Broughman and I seek to shine more light on intra-firm dynamics around trade sales. In particular, we investigate how VCs induce the “entrepreneurial team” – the founder, other executives, and common shareholders – to go along with a trade sale that they might have an incentive to resist.

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Link:

http://blogs.law.harvard.edu/corpgov/2013/02/27/carrots-sticks-how-vcs-induce-entrepreneurial-teams-to-sell-startups/

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Blogs.law Aggregation Hub » The Harvard Law School Forum on Corporate Governance and Financial Regulation

Tags:

mergers & acquisitions academic research acquisitions ipos liquidation venture capital firms jesse fried entrepreneurs brian broughman

Authors:

Jesse Fried, Harvard Law School,

Date tagged:

02/27/2013, 15:39

Date published:

02/27/2013, 09:23