Jennifer S. Fan, The Landscape of Startup Corporate Governance in the Founder-Friendly Era, 18 NYU J. BUS. L. 317 (2022), https://digitalcommons.law.uw.edu/faculty-articles/595
corporate governance, board, director, venture capital, VC, independent director, founder, empirical research, qualitative study, survey, interview, lawyers, diversity, equity, inclusion, DEI, fiduciary duties, unicorn, startup, neutral arbiter, swing vote
In corporate governance scholarship, there is an important debate about the nature and roles of the members of the board of directors in venture capital-backed private companies. The impact of a newly emerged, founder-centric model has been underappreciated, while the role of the independent director as tiebreaker or swing vote is vastly overstated. The reality is that corporate governance in these companies is a norm-driven, consensus-building process that rarely spills out into open conflict.
This is the first empirical study of startup corporate governance post-Great Recession and during the pandemic. Using survey and interview methodologies, this Article makes four primary contributions to the existing literature on corporate governance in venture capital-backed companies. First, during the last period of economic growth after the Great Recession, a founder-centric model of corporate governance emerged. This has had significant implications for venture capitalists on boards, how they choose to monitor the companies they invest in, and how boards are structured. Second, independent directors are typically not tiebreakers or swing votes as current scholarship assumes; in fact, they play a secondary role to founders and investors who serve on the board of directors. Although conflicts inevitably occur, the underlying modus operandi is geared toward consensus building, and it is rare for the board to have a non-unanimous vote. Third, although fiduciary duties and contractual mechanisms still loom large in corporate governance, most of the work is done informally with best practices and the growth-at-all-costs model framing much of what is done regarding corporate governance. Corporate governance measures are primarily prioritized during times of economic downturns and immediately prior to initial public offerings and acquisitions. Lastly, even with the increased focus on diversity, equity, and inclusion efforts in the larger national conversation about public companies, these discussions are still in their nascent stages in venture capital-backed private companies; it is in this area where corporate governance efforts need to be reimagined.