Monthly Archives: December 2016

The venture capital industry and the companies it supports are a crown jewel of the United States economy. The sector fuels innovation and economic activity and has spawned companies such as Apple, Amazon, Netflix, Cisco, Google, Facebook, Genentech, Tesla, and Twitter.

While there is an alignment of interests among stakeholders in venture-backed companies much of the time, certain recurring features of venture capital investments lead to potential structural conflicts under Delaware corporate law. Venture capital investment terms typically include the right to elect a partner of the fund to the private company’s board of directors. The venture fund directors in this context are “dual fiduciaries,” having fiduciary duties to the fund itself and its partners, as well as to the stockholders of the company on whose board they serve. In addition, venture capital investors obtain, in the form of preferred stock, preferential rights over holders of common stock in areas such as allocation of proceeds in an acquisition of the company, protection from future dilution, and special voting rights. Transactions in which the interests of the preferred and common holders diverge, such as down-round financings and acquisitions resulting in disparate treatment of stockholders, can create difficult conflicts of interest. Over time, the Delaware case law has come to hold that where preferred stock terms address an issue, the rights of preferred stockholders are generally contractual in nature, and directors should, where possible, prefer the interests of common stockholders. This may exacerbate the potentially conflicted position of the venture fund designee whose fund holds preferred stock.

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