12/17/2023 0 Comments Alternote venture capitalThere is a need for policy reform and implementation of new corporate governance principles and practices for unicorn firms, in order to address the concentration of power in the hands of founders. New VC investment rounds are now structured as “friendly” financing rounds. These changes give unicorn founders greater power vis-à-vis preferred shareholders and minority common shareholders to oppose a sale and keep the company private longer. The contractual mechanism that VC investors traditionally used to avoid opportunism by founders changed as a result of the intervention of these new market players. The hypothesis is that there are new market conditions, specifically, new market actors, that change the traditional investment patterns in unicorns, and affect private ordering. Unicorns are private companies that experience a transition from early stage to late stage to mega deals, and their new investors are accordingly affecting private ordering in the venture capital financing context. This Article explores a puzzle: how do the new nontraditional investors affect VC-backed startups corporate governance arrangements (such as voting rights, board composition and ownership structure)? As a result of these market and regulatory changes, there was a dramatic increase in alternative financing vehicles and new capital sources. Recent changes to the securities laws, provided incentives for unicorn founders to stay private longer, and for new market actors to invest in unicorn firms rather than in the U.S. In 2019, it is projected that many unicorns will finally go public, but until recently, there was a sharp decline in the number of IPOs in the USA. Monitoring unicorn managers is extremely important, because misbehavior, such as rent-seeking, corruption or other illegal activities, can not only hamper the manager’s decision-making process, but may also reduce the incentives and opportunities to invest in innovation in the future. Unicorn managers’ actions can have serious effects on economic activity. The CEOs of Uber and Zenefits also resigned lately due to various allegations. Theranos is not the only unicorn that gets press coverage these days. Holme is also scrutinized for various mismanagement claims. Holmes defrauded patients, doctors, investors, journalists, White House officials, military generals and employees. The unicorn bubble burst when the SEC charged Holmes with massive fraud. Theranos quickly joined the prestigious “unicorn” club, and enjoyed the benefits of an “all-star” board of directors. Elizabeth Anne Holmes was once celebrated by the press as the youngest female entrepreneur and billionaire, who dropped out of Stanford to start her own firm Theranos.
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