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

Authors

Brian J. Broughman, Indiana University Maurer School of LawFollow
Jesse M. Fried, Harvard University Law School

Document Type

Article

Publication Date

2013

Publication Citation

98 Cornell Law Review 1319 (2013)

Abstract

Venture capitalists (VCs) usually exit their investments in a startup via a trade sale. But the entrepreneurial team – the startup’s founder, other executives, and common shareholders – may resist a trade sale. Such resistance is likely to be particularly intense when the sale price is low relative to VCs’ liquidation preferences. Using a hand-collected dataset of Silicon Valley firms, we investigate how VCs overcome such resistance. We find, in our sample, that VCs give bribes (carrots) to the entrepreneurial team in 45% of trade sales; in these sales, carrots total an average of 9% of deal value. The overt use of coercive tools (sticks) occurs, but only rarely. Our study sheds light on important but underexplored aspects of corporate governance in VC-backed startups and the venture capital ecosystem.

Recommended Citation

Brian J. Broughman & Jesse M. Fried, Carrots and Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups, 98 Cornell Law Review 1319 (2013) (2013).
Available at: https://www.repository.law.indiana.edu/facpub/1282