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Independent Directors and Shared Board Control in Venture Finance

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  • Broughman Brian

    (Indiana University – Maurer School of Law, Bloomington, IN, USA)

Abstract

In most startup firms neither the entrepreneurs nor the investors control the board. Instead control is typically shared with a mutually appointed independent director holding the tie-breaking seat. Contract theory, which treats control as an indivisible right held by one party, does not have a good explanation for this practice. Using a bargaining game similar to final offer arbitration, I show that an independent director as tiebreaker can reduce holdup by moderating each party’s ex post threat position, potentially expanding the range of firms which receive external financing. This project contributes to the literature on incomplete contracting and holdup and improves our understanding of governance arrangements in startup firms.

Suggested Citation

  • Broughman Brian, 2013. "Independent Directors and Shared Board Control in Venture Finance," Review of Law & Economics, De Gruyter, vol. 9(1), pages 41-72, June.
    • Handle: RePEc:bpj:rlecon:v:9:y:2013:i:1:p:41-72:n:2
    DOI: 10.1515/rle-2012-0014
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    References listed on IDEAS

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    Cited by:

    1. Michael Ewens & Nadya Malenko, 2020. "Board Dynamics over the Startup Life Cycle," NBER Working Papers 27769, National Bureau of Economic Research, Inc.
    2. Brian Broughman & Jesse M. Fried & Darian Ibrahim, 2014. "Delaware Law as Lingua Franca: Theory and Evidence," Journal of Law and Economics, University of Chicago Press, vol. 57(4), pages 865-895.

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