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Cardozo Law Review

Abstract

This Article challenges the longstanding assumption that corporate law is largely irrelevant to non-listed companies and venture capital ( “VC”). Through a novel cross-country legal index covering twenty years and twelve jurisdictions, this Article shows that corporate laws have evolved through a process of “selective flexibility,” where certain legal barriers to VC deals are lifted, while others are stealthily preserved. For example, numerous reforms have enabled multiple-vote shares, but few have authorized the customization of board powers, limiting the universe of founder-investor agreements—and, ultimately, the development of startup ecosystems and VC markets.

Drawing on a comprehensive dataset of billion -dollar startups (“Unicorns”), this Article demonstrates that these underexplored rigidities in corporate law hamper Unicorn formation across jurisdictions. Inflexible legal rules also contribute to the exodus of talented entrepreneurs to jurisdictions with more flexible corporate laws (what this Article terms “Founder Drain”) and lead international VCs to impose multijurisdictional corporate structures to circumvent domestic corporate laws (what this Article terms “Offshore Governance”). These emerging phenomena hinder market and institutional development, depriving domestic industry participants—including professional service providers and courts —of the positive spillovers that thriving startup ecosystems typically generate.

The uncovered evolution of corporate law through selective flexibility also reveals emerging legal challenges. These include new agency problems and shadow governance structures that erode transparency and accountability in private markets. By exposing and critically examining these dynamics, this Article offers concrete, evidence-based insights to evaluate the tradeoffs involved in reforming corporate law to promote startups and VC, while tackling capital and talent mobility challenges.

Disciplines

Banking and Finance Law | Business Organizations Law | Jurisdiction | Other Law

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