Designing Startup Corporate Law: A Minimum Viable Product

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Review of Banking and Financial Law

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Startup companies and venture capital investments are flourishing worldwide, but at different rates in different countries. The myriad of corporate law reforms designed to change those patterns have had, generally, underwhelming results. A core reason behind the discrete impact of most reforms is that they focus on features of corporate law that are relevant (e.g., business registration requirements or investor protection), but that are no longer meaningful differentiators of legal systems’ aptitude to support the emergence and growth of innovative businesses.

This paper argues that corporate law still matters, and that crucial—yet under scrutinized—legal rules could be leveraged to foster startups and venture capital finance. Specifically, the set of rules that govern boards, shares, and shareholders’ agreements in non-listed corporations, which are collectively referred to as Startup Corporate Law (SCL). SCL matters because it determines the range of bargains between founders and investors over companies’ cash flow and control rights, conditioning startups’ finance and shaping their governance structure. Thus, unobserved changes in SCL have substantial explanatory power over past and present patterns. For example, they may contribute to explaining cross-country differences in startups’ ability to raise funds and the prevalence of specific financial instruments across jurisdictions and time frames. This evidence is essential to assess legal systems’ strengths and shortcomings to develop these industries.

The careful design of SCL could also stimulate the emergence and growth of innovative firms, by expanding founder-investor bargains (e.g., over direct board representation of certain classes of shares, or the allocation of voting rights based on future contingencies). Still, legal reforms to SCL are often introduced without meaningful deliberation, creating enforcement and creditor protection challenges that remain underexplored, despite impacting businesses beyond startups’ ecosystems. The paper discusses the most salient of those challenges, focusing on legal reforms, judicial decisions, and trends in financial contracting worldwide. It also identifies avenues of research on SCL to accurately assess the relationship between corporate law and venture finance, and address up-and-coming issues in the regulation of non-listed firms across jurisdictions.


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Recommended Citation

Alvaro Pereira, Designing Startup Corporate Law: A Minimum Viable Product, 42 Rev. Banking & Fin. L. 367 (2022).





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