The venture corporation

Abstract

Corporate law does not support the corporate operating systems of Silicon Valley startups. Startups are exit-driven, short-term ventures. Their shareholders care from day 1 about the exit strategy that the startup will finally pursue (i.e., how and when it will be acquired or go public). Startup shareholders often have differing views in this respect, and to allow them to collaborate efficiently nonetheless, startups have developed unique governance structures. These structures rely substantially on giving prominent shareholders the power to force their desired exit strategy on other shareholders and startups' managements. At the same time, however, startups are practically required to organize their businesses as corporations, which strictly undermines these governance structures. Corporate law compels shareholders to entrust almost all exit-related powers and discretion to the board of directors. The board, in turn, is obliged to serve the interests of the shareholders as a whole, disregarding particular shareholders' needs. This tension burdens startups by making their carefully crafted governance structures unreliable and difficult to enforce. Currently proposed solutions, whether based on sophisticated contracting or using non-corporate business entities, prove inadequate for resolving this fundamental clash. Instead, this paper calls for policymakers to introduce the “venture corporation,” a new business entity designed to answer startups' unique governance needs.