The Role of Relationships and Informal Norms in Entrepreneurial Finance

Contracting parties in an on-going relationship often rely on informal norms to resolve disputes and reduce transaction costs.  Known as “relational contracting,” this concept is typically studied in the context of procurement contracts between manufacturers and suppliers,[1] but it also applies in finance.[2]  A pre-existing relationship between an external investor and an entrepreneur can reduce monitoring costs, limit opportunistic behavior, and lower the initial cost of capital.

Despite the benefits of a relational contract, investors seeking to fund startups may need to look beyond their existing networks to find an entrepreneur with an innovative business plan.  Consistent with … Read more

CEO Side-Payments in M&A Deals

In addition to change-of-control benefits (“golden parachutes”), executives often negotiate for personal side-payment at the same time that they are bargaining with an acquirer over the sale of their firm. Side-payments differ from golden parachutes in that they are negotiated ex post in connection with a specific acquisition proposal, whereas golden parachutes are part of the executive’s employment agreement negotiated when she is hired. Side-payments are structured in a variety of different ways: by awarding a merger bonus (often structured as a non-compete agreement); augmenting parachute entitlements during deal negotiations; signing a post-merger consulting or employment contract; or granting ‘unscheduled’ … Read more

Delaware’s Familiarity

The following post comes to us from Brian J. Broughman, Associate Professor of Law at the Indiana University Maurer School of Law, and Darian M. Ibrahim, Professor of Law at William & Mary Law School. It is based on their recent papers, “Delaware’s Familiarity,” which is forthcoming in the San Diego Law Review and available here, and “Delaware Law as Lingua Franca: Theory and Evidence,” which is forthcoming in the Journal of Law and Economics and available here.

One of the enduring topics of interest in corporate law is why Delaware dominates the market for incorporations. The “internal … Read more