Opportunistic conduct and governance structure in startup firms

This dissertation contains three essays that explore the risk of opportunistic conduct between entrepreneurs and investors. Existing theory shows that the allocation of control rights within the firm affects the risk of ex post opportunism.;The first essay formally models the risk of opportunism under alternative governance arrangements. The financial contracting literature treats control as an indivisible right held either by a firm's entrepreneurs or by its investors. In contrast, data from VC-backed firms shows that board control is typically shared, with a third-party independent director holding the tie-breaking board seat ('ID-arbitration'). I show that ID-arbitration can reduce holdup by moderating each party's ex post threat position. Consequently, ID-arbitration can lead to the efficient outcome in circumstances where alternative governance arrangement---entrepreneur control, investor control, or state-contingent control---are either unavailable or likely to lead to suboptimal results. This essay has implications for the literature on financial contracting literature and the literature on the theory of the firm.;The second essay provides a new theory for the role of independent directors in the governance of VC-backed firms. The existing theory of independent directors only applies to publicly traded firms. In startup firms I show that a tie-breaking independent director can arbitrate conflicts between a firm's entrepreneurs and VC investors. Provided the independent director is relatively unbiased this arrangement commits the entrepreneur and VCs to reasonable behavior and can reduce the opportunism that would result if either party were to control the board. Consistent with my theory, data from Silicon Valley startups illustrate several mechanisms entrepreneurs and VCs use to select an unbiased independent director. I consider implications for corporate law and fiduciary obligations in startup firms.;The third essay explores the risk of VC opportunism related to CEO replacement and follow-on financing. VCs negotiate for extensive control rights when investing in startups. Some commentators suggest that VCs may exploit their control to opportunistically fire the founder-CEO, or to conduct follow-on financing rounds that dilute the founder. However, there is no evidence on whether either form of misbehavior is common. Using data collected from the founders of 47 Silicon Valley firms, I find no evidence of opportunistic termination and only very little evidence of dilutive financing. This essay suggests these two forms of VC opportunism rarely occur outside of litigated conflicts.