This online casebook is intended to be used as a supplement to the course Start-Up Companies and Venture Capital at Boston College Law School. You may print this or read it online. Please refer to the syllabus for assignments.
The materials that follow provide some of the most relevant caselaw for start-up lawyers in the context of venture financings. At the most general level, the most important caselaw for start-ups and venture-backed firms reflects two basic problems that pervade disputes involving start-up businesses:
First, convertible preferred stock, the currency of venture financing, is a creature of contract. Preferred stock has only those attributes and rights conferred on it by way of negotiation and evidenced in the certificate of incorporation. Investors should not look to the courts to resolve ambiguities over the rights of preferred stock in their favor. A court will not rescue lazy drafting.
Second, when founders and investors sit on the board of directors, they must deal with the start-up corporation at arm's length. Founders and investors get into trouble when the confuse their position and put their own parochial interests ahead of those of the corporation. This is a common problem in small businesses. Indeed, most of the veil piercing litigation you may have studied in your basic corporate law class involved this kind of confusion. However, role confusion is also common in start-up and venture backed businesses, but for different reasons. Founders may have difficulty adapting to the addition of outside investors in what was previously a small, likely informal, organization. At later stages of the venture-backed company's life, investors may put their own interests in seeking a viable exit over their duties to the company as a whole.
While these two basic problems are the most common challenges facing start-up businesses, the start-up faces a myriad of other corporate law challenges. Your knowledge of the corporate law as well as securities law will come in handy as you navigate the world of start-up and venture-backed companies.
This book, and all H2O books, are Creative Commons licensed for sharing and re-use. Material included from the American Legal Institute is reproduced with permission and is exempted from the open license.