DP15024 Board dynamics over the startup life cycle

Author(s): Michael Ewens, Nadya Malenko
Publication Date: July 2020
Date Revised: March 2021
Keyword(s): Allocation of control, Board Of Directors, corporate governance, Independent Directors, Mediation role, venture capital
JEL(s): G24, G34
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15024

Venture capital (VC) backed firms face neither the regulatory requirements nor a major separation of ownership and control of their public peers. These differences suggest that independent directors could play a unique role on private firm boards. This paper explores the dynamics of VC-backed startup boards using novel data on director entry, exit, and characteristics. We document new facts about board composition, allocation of control, and dynamics, and examine the roles of independent directors. At formation, a typical board is entrepreneur-controlled. Independent directors join the median board after the second financing, when board control becomes shared, with independent directors holding the tie-breaking vote between entrepreneurs and VCs. At later stages, control switches to VCs and independent director characteristics change. These patterns are consistent with independent directors playing both a mediating and advising role over the startup life cycle, and thus representing another potential source of value-add to startup performance.