2025 Theses Doctoral

Essays in Startup Governance

Weiss, Gad

Throughout the last four decades, scholars studying VC-backed startups have sought to rationalize the way they are structured and financed. Startups' governance and capital structures are often described to reflect not merely the arbitrary equilibrium point between the bargaining powers of entrepreneurs, investors, and other stakeholders involved. Rather, they are viewed as means for maximizing the startup's enterprise value by helping it attract capital and talent optimally. While earlier, seminal works in this field have laid the foundations for understanding VC financing in this way, more recent works continue this effort by examining the capital and governance structures of startups from new angles and through evolving market circumstances.

This dissertation seeks to contribute to this important line of work and expand it by addressing three distinct questions.

The first chapter observes the fit of the Delaware corporation for structuring VC-backed startups, making the case that Delaware’s corporate law does not support the corporate operating systems they require. Startups are exit-driven, short-term ventures. Their shareholders care from day one 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, the chapter calls for policymakers to introduce the “venture corporation,” a new business entity designed to answer startups’ unique governance needs.

The second chapter is focused on the way startup’s investors use of control rights changes through the startup’s lifecycle. Startups’ earliest investors frequently compromise on the extent of control rights they possess. Their investment terms do not afford them the same degree of contractual controls that later-stage investors have, and the securities that they hold often exclude them, at least temporarily, from shareholder status and the statutory control rights and protections it entails. This inclination to cede control contrasts the practices of later-stage startup investors, who rely more heavily on strong-form control rights to mitigate firm-specific risks. The chapter introduces a novel framework for understanding early-stage startup governance structures. It emphasizes the distinctive factors that make investor control more costly and less valuable for startups’ earliest investors than their later-stage counterparts despite the greater risks and uncertainties associated with earlier investments. These factors include the substantial information imbalance favoring entrepreneurs during the very early stage and the complex interplay between control and entrepreneurial incentives. Collectively, these elements shape the rationale behind early investors' tendency to grant entrepreneurs more flexibility and contribute to the widespread utilization of deferred equity instruments in early-stage financing.

The last chapter considers whether there is merit to building startups with alternative strategic goals in mind. In recent years, two high-profile AI startups – OpenAI and Anthropic – have introduced innovative business structuring models that turn startup structuring conventions on their heads. Most startups, as mentioned, seek to optimize their governance and capital structures to help attract investments and talent. The primary motive behind these new models, conversely, is to help align startup managements’ incentives with those of society. They strive to ensure that protecting society from the risks that their technology may pose guides startup managers’ discretion, keeping managers insulated from pressures to maximize enterprise value instead. The chapter examines the following question: are “aligned” business architectures likely to be adopted by other startups that care about the societal implications of their technology, and would society benefit from their broad-based adoption? The chapter concludes that the likely answer to both parts of the question is negative. In most startups, these models are not expected to achieve the promised alignment of incentives, and society’s interests may not be well-served even if they did. At the same time, startups implementing these models incur the inevitable costs of a suboptimal allocation of their control and economic rights, making Aligned Structuring too costly for most prosocial startups to consider seriously.