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The United States’ startup ecosystem is of utmost importance to its society and economy. Yet, state legislatures burden the ecosystem’s operation by failing to provide its participants with business entities that would meet their unique structuring needs. Startups are ventures programmed to launch, scale, and exit quickly and profitably. Still, they must compromise for organizing themselves as corporations – structures praised for supporting long-term joint investments, but unsuitable for structuring exit-bound, short-term ventures. Startups attempt to contract around undesirable corporate features using intricate bypass mechanisms. However, the practical utility of these costly workarounds is limited by various legal and business constraints. The result is a deadweight loss, reflected by fewer successful venture capital investments and suboptimal transaction structuring.
This discrepancy between startups’ business model and business structuring has drawn the attention of scholars, who have made various suggestions to reform corporate law and make it more startup-friendly. This Article takes a different approach. It suggests that satisfying startups’ specific structuring needs should be done by providing them with a custom-made business structure to use, not by stretching the corporate structure to fit both startups and nonstartup businesses. The novel business structure introduced in this Article – “venture corporations” – would be designed to serve startups’ distinctive character as exit-driven entities. The Article outlines venture corporations’ desirable features, the market inefficiencies they could help mitigate, and the challenges that must be overcome for their successful adoption by the industry.
Link to paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4338030