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  • Bert W. Wasserman Workshop in Law and Finance: "Don't Go Chasing Waterfalls: Fiduciary Duties in Venture Capital Backed Startups" with Prof. Sarath Sanga '14 of Northwestern Pritzker School of Law
September 2 Thursday

Bert W. Wasserman Workshop in Law and Finance: "Don't Go Chasing Waterfalls: Fiduciary Duties in Venture Capital Backed Startups" with Prof. Sarath Sanga '14 of Northwestern Pritzker School of Law

  • Thursday, September 2, 2021 at 4:10PM - 5:40PM
  • SLB Room 121
  • Open To The Yale Community
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Description

Sarath Sanga '14, Associate Professor of Law at Northwestern Pritzker School of Law, will be presenting from his paper, "Don't Go Chasing Waterfalls: Fiduciary Duties in Venture Capital Backed Startups" (joint with  Eric Talley).  The abstract of the paper reads:

"We develop a model of venture capital contracting and use it to evaluate an emergent set of judicial precedents in corporate law, which we label the Trados doctrine. In our model, founders hold common stock while venture capital investors hold convertible preferred stock. We show that preferred shareholders have inefficient incentives to liquidate low-valued firms and to continue high-valued firms, while common shareholders inefficiently favor the opposite. The extent of incentive misalignment depends on the firm’s intrinsic and outside valuations, and it is most severe around preferred’s liquidation preference and conversion point. Although legal liability rules can rectify these misalignments, they can only do so categorically when management is obligated to prioritize preferred shareholders’ interests. The Trados doctrine, however, requires the opposite: under Trados, boards must accord primacy to common shareholders’ interests, treating preferred shareholders as contractual claimants. More generally, we offer a precise mechanism for how capital structure, corporate governance, and legal doctrine jointly determine firm value."

The complete paper is available here.

Sponsoring Organization(s)

Yale Law School Center for the Study of Corporate Law

Law, Economics & Organization Workshop