Theory and Practice Legal Resource Materials
Entrepreneurship Law Editorial Team
William J. Baumol et al., GOOD CAPITALISM, BAD CAPITALISM AND THE ECONOMIC OF GROWTH AND PROSPERITY (2007).
Abstract: Most people on Earth now live in a capitalist economy. As the authors of this book show, however, there are distinctly different types of capitalism and it takes a mixture of these types to get all the economic, social, and political benefits that capitalism affords.
Jon Burgstone & Bill Murphy, Jr., Breakthrough Entrepreneurship: The Proven Framework for Building Brilliant New Businesses (2012).
Abstract (from authors):
This book presents a framework for developing a business idea and growing it into a successful business. The authors studied hundreds of successful start-up companies to determine what common strategies work best in creating a business. The book also examines the psychological side of building a new company.
Comparative Entrepreneurship Initiatives: Studies in China, Japan and the USA (Chikako Usui, ed., 2011).
(adapted from publisher):
Comparative Entrepreneurial Initiatives offers a unique investigation in to the three largest economies of the world: China, Japan and the USA. Written by leading scholars with intimate knowledge of each country, it brings together historical, institutional, cultural, and case study approaches and shows how the institutional context plays a key role in facilitating entrepreneurship. The contributors draw out the intersection of individual and group experiences with the historical and institutional context of the three countries and show a wide variation in entrepreneurial patterns that result from cultural, legal, and political factors. Case studies integrate the individual-level details of entrepreneurs within societal context and address issues that typically arise in new ventures. This book provides a better understanding of the national forces that promote and constrain entrepreneurship. It is timely in its analysis of the role of entrepreneurial initiatives in the transformation of global competition in the 21st century.
Creativity, Law and Entrepreneurship (Shubha Ghosh & Robin Paul Malloy, eds., 2011).
(adapted from publisher):
Creativity, Law and Entrepreneurship explores the idea of creativity, its relationship to entrepreneurship, and the law's role in inhibiting and promoting it. The inquiry into law and creativity reduces to an inquiry about what people do, what activities and actions they engage in. What unites law and creativity, work and play, is their shared origins in human activity, however motivated, to whatever purpose directed. In this work contributors from the US and Europe explore the ways in which law incentivizes particular types of activity as they develop themes related to emergent theories of entrepreneurship (public, private, and social); lawyering and the creative process; creativity in a business and social context; and, creativity and the construction of legal rights.
Entrepreneurship and Innovation in Evolving Economies (Megan M. Carpenter ed., 2012).
Abstract (from publisher):
The very foundation of the economy is changing. Across the United States, primary and secondary sector industries are no longer as viable as they once were - because the particular businesses are no longer profitable, because the underlying resources are no longer as plentiful or desirable, or because human activity is not essential to various aspects of an industry's operations. As economies evolve from traditional industrial resources, such as mining and manufacturing, to 'new' resources, such as information and content, innovation and entrepreneurship are key.
Entrepreneurship and Innovation in Evolving Economies
examines the role of law in supporting innovation and entrepreneurship in communities whose economies are in transition. It contains a collection of works from different perspectives and tackles tough questions regarding policy and practice, including how support for entrepreneurship can be translated into policy. Additionally, this collection addresses more concrete questions of practical efficacy, including measures of how successful or unsuccessful legal efforts to incentivize entrepreneurship may be, through intellectual property law and otherwise, and what might define success to begin with.
Anna Grandori & Laura Gaillard Giordani, Organizing Entrepreneurship (2011).
(adapted from publisher):
Entrepreneurship has regained center stage in the contemporary knowledge-intensive and innovation-driven economy, as well as in research. Integrating classic and recent insights into the organization, economics and management of entrepreneurial activities, Organizing Entrepreneurship aims to blend rigor with relevance, and connects theory with practical problems around key questions. Original case studies are discussed and integrated throughout the text, which reflect a wide range of sectors (from agri-business to high tech) and countries (including emerging economies).
Robert D. Hisrich, Michael P. Peters & Dean A. Shepherd, ENTREPRENEURSHIP (2006).
Abstract: Entrepreneurship, by Robert Hisrich, Michael Peters and Dean Shepherd has been designed to clearly instruct students on the process of formulating, planning, and implementing a new venture. Students are exposed to detailed descriptions of 'how to' embark on a new venture in a logical manner. Comprehensive cases at the end of the text have been hand-picked by the authors to go hand-in-hand with chapter concepts. The superb author team of Hisrich, Peters, and Shepherd draw from their distinct backgrounds to create a book that addresses the dynamics of today's entrepreneurial challenges. From Bob Hisrich's expertise in global entrepreneurship to Mike Peter's background as a both a real-life entrepreneur and academic to Dean Shepherd's current research on cognition and entrepreneurial mindset, this book balances the crucial line between modern theory and practice.
Howard H. Stevenson, A PERSPECTIVE ON ENTREPRENEURSHIP (1983).
Abstract: Designed to highlight alternative concepts of good management and the need for entrepreneurship as a response to societal changes. It argues that entrepreneurship can be fostered or destroyed as a function of the administrative setting.
Jeffrey A. Timmons & Stephen Spinelli, NEW VENTURE CREATION: ENTREPRENEURSHIP FOR THE 21ST CENTURY (2007).
An exhaustive US text by one of the most senior of US academics interested in both the theory and practice of new business formation and management.
Arvind Chaturvedi & Sonu Goyal, Changing Severity of Impediments for Entrepreneurs in India: An Empirical Analysis, 16 Int'l J. Entrepren. & Small Bus. 1 (2012).
One of the key emphasis areas of India's economic reforms has been to promote entrepreneurship. Since the beginning of 1990s, in the last 20 years the economic planning has focused on liberalisation of state's control to enable an entrepreneur to overcome the impediments in setting up enterprises and establishing them. It is generally believed that over the last two decades of reform process the problems faced by start ups have also reduced. This study has been carried out using data gathered through a survey of 136 entrepreneurs based in New Delhi, the capital city of India. The three periods defined for the study of impediments faced by the entrepreneurs in setting up their ventures are: before 1994 (Period I); between 1995 to 2004 (Period II) and 2005 onwards (Period III). Based on the existing frameworks of country institutional profile key impediments for the survey were identified and analysed in the light of India's economic reform process impacting the entrepreneurial activity.
Juan Pablo Couyoumdjian, Who Walks Out? Entrepreneurship in a Global Economy, 32 Int'l Rev. L. & Econ. 158 (2012).
Abstract (from authors):
This article examines how entrepreneurs decide in what country to locate their businesses. The quality of a location's institutions, measured by factors such as political security, bureaucracy, and good governance, play an important role this decision.
Ross B. Emmett, Frank H. Knight on the "Entrepreneur Function” in Modern Enterprise, 34 Seattle U. L. Rev. 1139 (2011).
Abstract (from author):
Frank Knight’s theory of the entrepreneurial function in modern enterprise is explored in two contexts. The first is the dismissal of the neoclassical theory of business enterprise by Berle and Means in The Modern Corporation and Private Property, and their subsequent call for measures that would ensure corporations acted in the social interest. The second context used to explore Knight’s theory of entrepreneurship is his later arguments regarding the problem of intelligent control in a democratic society. Underlying all of Knight’s work are his concerns about freedom and moral judgment in the midst of uncertainty, with the attendant problems commonly referred to today as the principal-agent problem and moral hazard. Knight argues that the entrepreneur personally absorbs these problems through his responsible direction of the modern enterprise; seen this way, profit is not just the return for bearing the risks of unknown consequences, but specifically for the courage to take up the challenge of organizing productive resources in the face of principal-agent and moral hazard problems. In the latter part of Risk, Uncertainty, and Profit, Knight argues that social functionaries are not entrepreneurs, and hence that democratic action will be plagued by principal-agent and moral hazard problems; a conclusion that much vexed him in his later ruminations on the fate of liberal democratic society. Were the authors to apply Knight’s insights to Berle and Means’ call for social control of the modern corporation, one could turn their argument around and ask: control by whom, for whose interest?
Jason R. Fitzsimmons and Evan J. Douglas, Interaction Between Feasibility and Desirability in the Formation of Entrepreneurial Intentions, 26 J. Bus. Venturing 431 (2010).
This article examines how the perception of desirability and feasibility determine entrepreneurial intentions, based on a regulatory focus theory.
Stephan F. Gohmann, Institutions, Latent Entrepreneurship, and Self-Employment: An International Comparison, 36 Entrepren. Theory & Prac. 323 (2012).
This paper examines how the institutional environment in 18 countries affects the self-employment decision, as well as the preferences of latent entrepreneurs—individuals who prefer to be self-employed. Latent entrepreneurs fall into two groups, those who are currently self-employed and those who are not—the “truly latent entrepreneurs.” These two groups differ in their responses to changes in the institutional environment. An occupational choice model where institutions affect switching costs informs the empirical model. As institutions such as economic freedom improve, preferences for self-employment increase for both groups, but the effect is greater for those who are currently self-employed.
Magnus Henrekson, Entrepreneurship and Institutions, 28 Comp. Lab. L. & Pol'y J. 717 (2006-2007).
Abstract: In this paper entrepreneurs are defined as agents who bring about economic change by combining their own effort with other factors of production in search of economic rents. The institutional setup is argued to determine both the supply and direction of entrepreneurial activity. Four key institutions are explored more closely: property rights protection, savings policies, taxation and the regulation of labor markets. Institutions have far-reaching effects on entrepreneurship, and they largely determine whether or not entrepreneurial activity will be socially productive. Due to the responsiveness of entrepreneurship to the institutional setup it is maintained that in-depth analyses of specific institutions are required in order to further our understanding of the determinants of entrepreneurial behavior and the economic effects of entrepreneurship. The paper also demonstrates that it is problematic to use self-employment as an empirical proxy for productive entrepreneurship.
Steven H. Hobbs, Toward a Theory of Law and Entrepreneurship, 26 Cap. U.L. Rev. 241, 261 (1997)
Abstract: The irresistible urge to strike out on one's own and start an exciting business is part of our American landscape. The idea of entrepreneurship is touted in the popular media, and the popular press publishes plenty of books on the subject. As a discipline, entrepreneurship has flourished in America's schools of business. The possibilities are endless in a world of constantly emerging technologies and shifts from a manufacturing-base economy to a service/information-base economy. While many large corporations are adapting entrepreneurial theories to become more competitive in a global market, the heart of entrepreneurship lies in the creation of small ventures by one person or a small group of individuals.
Darian M. Ibrahim, How Do Start-ups Obtain Their Legal Services?, 2012 Wis. L. Rev. 333 (2012).
(from author): This Essay is the first to examine, using responses to online surveys, the use of in-house versus outside counsel by rapid-growth start-up companies. It also explores, from the vantage point of the start-up's entrepreneur, some reasons for that choice. The Essay tests several hypotheses derived from the economic and entrepreneurship literatures about the benefits of in-house versus outside counsel in the unique context of start-up firms.
Darian M. Ibrahim & D. Gordon Smith, Entrepreneurs on Horseback: Reflections on the Organization of Law, 50 Ariz. L. Rev. 71 (2008).
Abstract (from the introduction):
“Law and entrepreneurship” is an emerging field of study. Skeptics might wonder whether law and entrepreneurship is a variant of that old canard, the Law of the Horse. In this Essay, we defend law and entrepreneurship against that charge and urge legal scholars to become even more engaged in the wide-ranging scholarly discourse regarding entrepreneurship. In making our case, we argue that research at the intersection of entrepreneurship and law is distinctive. In some instances, legal rules and practices are tailored to the entrepreneurial context, and in other instances, general rules of law find novel expression in the entrepreneurial context. As a result, studying connections between law and entrepreneurship offers unique insights about them both.
Susan R. Jones, A Legal Guide to Microenterprise Development, 2004 Amer. Bar Ass’n Sec. Bus. L. Pub.
Abstract: Addresses microenterprise and seeks to offer guidance to lawyers who volunteer to represent microentrepreneurs and microenterprise development organizations that facilitate the development of these small businesses. The aspects covered in this manual include: how lawyers can get involved in microenterprise; guidelines on legal formation issues and business issues for microbusinesses; setting up microenterprise programs; information on organizations that support microenterprise and assistance provided by federal agencies. The manual also includes a workbook containing sample loan documents and other resources.
Lisa A. Kloppenberg, Educating Problem Solving Lawyers for Our Professions and Communities, 61 Rutgers L. Rev. 1099 (2008-2009).
Abstract: The University of Dayton School of Law began to offer the “Lawyer as Problem Solver” curriculum in 2005. This essay describes our comprehensive curricular revision, aimed at producing problem-solving graduates who are well prepared for practice and leadership in the legal profession and their communities, aligned with the University’s Catholic and Marianist mission of educating “the whole person.” Building on a tradition of experiential learning at Dayton, the curriculum integrates skills more comprehensively, provides practice-related tracks or concentrations in three broad subject areas, and offers an accelerated option that allows students to graduate in as little as two calendar years. The curricular package includes features to attract highly motivated students and provide them with a rigorous, engaging educational experience, including a required externship and a required clinical or capstone experience modeled on the realities of modern legal practice.
Jeffrey M. Lipshaw, Why the Law of Entrepreneurship Barely Matters, 31 W. New Eng. L. Rev. 701 (2009).
Frederick W. Lambert, A Preliminary Inquiry Into the Transcendence of Value Creation, 74 Or. L. Rev. 121 (1995).
Abstract: A consideration of value creation as it influences lawyer and client conduct beyond the confines of the business transaction may be a digression from the stated purpose of the Symposium. But considering the outlying and less immediate and observable consequences of what lawyers do for business clients will illuminate how value is added or subtracted in the business transaction by the sometimes conflicting institutional forces bearing on lawyers in business practice, particularly those in large firms. The preliminary thesis advanced by this essay is as follows: value creation constitutes a medium connecting the economic activity of lawyers with the structure of their organizations, and ultimately influences noneconomic values such as collegiality, solidarity, professionalism and independence - each apparently in decline.
Amir N. Licht, The Entrepreneurial Spirit and What the Law Can Do About It, 28 Comp. Lab. L. & Pol'y J. 817 (2007).
Abstract: Fostering entrepreneurship has become a central policy goal for economic institutions around the world, ranging from regional to national to international bodies. Underlying this trend is the belief that entrepreneurship is key for a number of desirable social outcomes, including economic growth, lower unemployment, and technological modernization. This paper therefore asks a simple and at the same time crucial question: What makes some people more entrepreneurial than others? A companion question follows almost immediately: Can policy-makers do something to promote entrepreneurship?
Emile Loza, Female Entrepreneurship Theory: A Multidisciplinary Review of Resources (Journal of Women's Entrepreneurship and Education, Institute of Economic Sciences, Belgrade, Serbia, 2011), available at http://ssrn.com/abstract=1833385.
(adapted from author):
This article reviews academic literature regarding and otherwise relevant to the study of female entrepreneurship from across multiple disciplines. The author reports that the legal academy has only minimally engaged in entrepreneurship scholarship and not at all as to female entrepreneurship. The author reviews the origins of female entrepreneurship literature and the compilations describing the emergence of female entrepreneurship as a business and social phenomenon, the women who undertook and led these endeavors, and changes in the characteristics of women entrepreneurs over time. The author also presents materials in topical sections on business structure, strategy, and performance; culture, sex, and gender; diversity; economic and social development; essentialization and masculine norms; finance; identity issues; innovation and technology; motivation; personal and professional domains; psychology; social capital; and standpoint theory. She also points out the needs for a unified definitional taxonomy for entrepreneurship; for greater study of innovation-driven entrepreneurship, including as an endeavor of women; for the legal academy to enter the field of entrepreneurship study, including as to female entrepreneurship, to develop a new substantive area of law; and for entrepreneurship scholars to approach their work with interdisciplinarity.
Paolo Di Martino, Legal Institutions, Social Norms, and Entrepreneurship in Britain (c.1890–c.1939), 55 Acad. Mgmt. J. 35 (2012).
This article analyses the functioning of debt-discharge procedures in England and Wales in the light of the debate on entrepreneurial failure in the years between the late Victorian age and the interwar period. Using an original dataset and an empirical approach, it is argued that social norms, cultural elements, and class considerations influenced the outcome of decisions in a way that could have reduced the incentives for economic agents to engage with productive activity. Results show that over the entire period judges paid disproportionate attention to moral issues, and often gave lighter sentences to members of the elite who went into bankruptcy for personal reasons, and tougher ones to entrepreneurs who failed because of engagement with economic activity.
Benjamin Means, Foreword: A Lens for Law and Entrepreneurship, 6 Ohio St. Entrepren. Bus. L.J. 1 (2011).
In this Foreword, the author affirms the value of legal scholarship concerning entrepreneurship but question whether law and entrepreneurship is a “field” in that it involves a “discrete factual setting [that] generates the need for distinctive legal solutions.” First, there is the problem of identifying the relevant factual setting-what is entrepreneurship? Perhaps entrepreneurship is simply the output of individual “entrepreneurs-people with the ideas, the vision, and the perseverance to launch . . . new businesses.” If so, then law and entrepreneurship concerns the legal needs of small, startup business ventures.... Instead of debating the boundaries of law and entrepreneurship as a field, the author uses the metaphor of a lens to contend that law and entrepreneurship should be understood more as a perspective than as a subject of inquiry. Law and entrepreneurship scholars need not restrict their focus to small-business creation and can explore how law and innovation relate in a wide variety of contexts.
Thomas H. Morsch, Discovering Transactional Pro Bono, 72 UMKC L. Rev. 423 (2003).
Abstract: Lawyers who have spent most of their professional careers in tax, corporate, real estate or business law have long felt that it is difficult for them to make the same pro bono contributions as lawyers who specialize in trial work. In recent years, the situation has changed dramatically.
David E. Pozen, We Are All Entrepreneurs Now, 43 Wake Forest L. Rev. 283 (2008).
Abstract (from author):
A funny thing happened to the entrepreneur in legal, business, and social science scholarship. She strayed from her capitalist roots, took on more and more functions that have little to do with starting or running a business, and became wildly popular in the process. Nowadays, "social entrepreneurs" tackle civic problems through innovative methods, "policy entrepreneurs" promote new forms of government action, "norm entrepreneurs" seek to change the way society thinks or behaves, and "moral entrepreneurs" try to alter the boundaries of duty or compassion. "Ethnification entrepreneurs," "polarization entrepreneurs," and other newfangled spinoffs pursue more discrete objectives. Entrepreneurial rhetoric has never been so trendy or so plastic. This Article documents the proliferation of entrepreneurs in the American academic idiom, and it offers some reflections on the causes and consequences of this trend.
Rebecca Sandefur & Jeffrey Selbin, The Clinic Effect, 16 Clinical L. Rev. 57 (2009).
Abstract: Lawyers, law professors and experts on professional education perennially proclaim that law schools teach students to think like lawyers but not to act like them. Legal education’s emphasis in the cognitive dimension comes at the expense of critical professional development in the skills (expertise) and civic (identity) dimensions. Clinical legal education has long been prescribed as a pedagogic corrective to these perceived deficits in law school training, but little research exists to inform our understanding of whether - much less how, when, why and for whom - clinics deliver on this promise. With data from a new, nationally representative survey of early-career attorneys in the United States, this Article explores evidence of clinical education’s impact in the skills and civic dimensions of lawyer training. In the skills dimension, new lawyers rate clinical training more highly for making the transition to the actual practice of law than many other law school experiences, particularly the doctrinal core frequently the object of the standard critique. In the civic dimension, the study finds no evidence of a relationship between clinical training experiences and new lawyers’ pro bono service, and no consistent evidence of a relationship between clinical training experiences and new lawyers’ civic participation. Although there is no evidence of a general relationship between clinical training experiences and public service employment, the study finds a strong relationship between clinical training and career choice for those young attorneys who recall that they came into law hoping to improve society or help individuals. For this group of new lawyers, clinical training may have been an important factor in sustaining or accelerating their original civic commitments. As a result of these findings and the continued dearth of data on these important questions, the Article concludes with a call for a new generation of research into the effects of clinical legal education on the preparation of students for the practice and profession of law.
Friederike Welter, All You Need Is Trust? A Critical Review of the Trust and Entrepreneurship Literature, 30 Int'l Small Bus. J. 193 (2012).
(adapted from journal):
This article critically reviews the literature pertaining to trust and entrepreneurship, highlighting the diversity and complexity of this construct. In addition, the interdependency of trust with context, as well as its dual nature in relation to control and as a sanctioning mechanism, is explored. Trust can be both a dispositional and a behavioural outcome; ‘genuine’ (personal) trust, sanctions and control coexist and co-evolve within and across different contexts. Trust influences entrepreneurship, not always positively, but entrepreneurial behaviour also has an impact on levels of personal and institutional trust. Future studies of trust and entrepreneurship need to acknowledge the bright and dark sides of trust, its duality and the different contexts in which it occurs. Ultimately, one needs to develop a far more critical analysis of the importance and role of trust in the context of entrepreneurship.
Catherine Fisk, "An Ingenious Man Enabled by Contract": Entrepreneurship and the Rise of Contract (2007).
A legal ideology emerged in the 1870s that celebrated contract as the body of law with the particular purpose of facilitating the formation of productive exchanges that would enrich the parties to the contract and, therefore, society as a whole. Across the spectrum of intellectual property, courts used the legal fiction of implied contract, and a version of it particularly emphasizing liberty of contract, to shift control of workplace knowledge from skilled employees to firms while suggesting that the emergence of hierarchical control and loss of entrepreneurial opportunity for creative workers was consistent with the free labor ideology that dominated American thinking on the subject of work.
Viktor Mayer-Schoenberger, Entrepreneurial Law,
Abstract (from author):
Innovative entrepreneurship is seen as a central driver of economic growth. Lawmakers around the world have attempted to use law to foster such entrepreneurship. Yet, frequently law is described as the enemy of entrepreneurs. This paper argues that this is a fundamental misconception. In part I of the paper I suggest three distinct roles leveling, protecting, and enabling - that law can play to foster entrepreneurship. Part II develops a comprehensive framework for crafting laws that facilitate entrepreneurship based on risk theory. Utilizing expected utility theory I propose that lawmakers may want to focus less on direct financial losses or gains for entrepreneurs (like subsidies or tax breaks), and more on the predictability of legal processes. Behavioral economics suggests that lawmakers need to be careful how they frame laws intended to facilitate entrepreneurship. A risk-based framework for entrepreneurial law rests on an important assumption: on the linearity of the innovation process and the central importance of the individual entrepreneur. Part III of the paper shows how a more nuanced understanding of innovation has fundamental repercussions for the role we assign law. I suggest (and demonstrate through cases) that the most appropriate role for law may not be reactive (however well thought out), but entrepreneurial actively creating market tensions that entrepreneurs then successfully exploit. I conclude that lawmakers have a much more central and important role in shaping entrepreneurial activity in our nation than has traditionally been ascribed to them.
Minnesota Journal of Business Law and Entrepreneurship
D. Gordon Smith & Masako Ueda, Law and Entrepreneurship: Do Courts Matter? 2(1) Entrepreneurial Bus. L.J. 353 (2006), Univ. of Wis. Legal Studies Research Paper No. 1029.
Abstract (from authors): In this essay, we sketch the outlines of a research agenda exploring links between courts and entrepreneurship. Our conception of "law and entrepreneurship" encompasses the study of positive law (including constitutions, statutes, and regulations), common law doctrines, and private ordering that relate to "the discovery and exploitation of profitable opportunities by new firms."
We briefly survey the economics literatures that relate to law and entrepreneurship, including the "law and finance" literature launched by the work of Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny ("LLSV"). Relying on the suggestive work of LLSV and other economists who have labored over the connections between entrepreneurship and law, we suspect that courts may play an important role in facilitating or hindering entrepreneurial activity. We are particularly interested in the possibility that courts may facilitate the evolution of legal rules to address novel issues raised by entrepreneurial firms. This "adaptability hypothesis" may be subject to empirical testing, thus shedding light on the otherwise perplexing divide between common law and civil law countries identified by LLSV. The motivation for such a test lies in the conjecture that common law countries update their laws more frequently than civil law countries through judicial intervention. Adaptability in this sense is said to encourage entrepreneurship because outmoded laws allow for opportunism, thus discouraging capital formation. The adaptability hypothesis implies that judges in common law systems have more room to maneuver than judges in civil law systems, and we describe the method by which we intend to approach our future study of adaptability.
Michael Whincop, Entrepreneurial Governance (August 2000).
Abstract (from author): The primary regulatory concern with respect to small to medium enterprises (SMEs) is capital raising, which reflects the so-called finance gap. For listed corporations, however, most attention is directed to corporate governance, because of the agency costs associated with more dispersed ownership and their infrequent resort to capital markets. What is lacking is an account of corporate governance issues arising in SMEs. Why is this significant? First, existing theories of the endogeneity of boards, such as those developed by Fama and Jensen, do not explain the careful work of venture capitalists to develop strong boards, including outside directors. Why do they do such a thing, instead of addressing exchange issues on a purely bilateral basis with the entrepreneur? Second, to the extent that corporate governance influences the scale of transaction costs, we might expect that governance is systematically related to the capacity of firms to raise finance, both venture capital and in an IPO.
In order to address these issues, this paper draws on a number of distinct literatures - the economic literature on venture capital, the organizational behavior literature on trust, the management literature on industrial networks, and the law and economics theorization of the role of norms in contracts. It develops an informal theory that the venture capitalists’ contract with the entrepreneur establishes formal end-game norms; these are "kept in the bottom drawer" while the relation remains cooperative. The board has a role in providing the possibility of cooperation within the strategy space marked out by these EGNs. In addition, it functions as an information conduit by which third parties may function to enforce relational norms. The legal rules that support these functions are also examined.
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