In 2023, a former employee and shareholder of a struggling startup called Teespring sued not just the company and its managers, but also one of its investors: Hydrazine Capital, a venture fund affiliated with OpenAI CEO Sam Altman. The plaintiff won a judgment against the company after it stopped paying him. But when he attempted to collect, he allegedly found that the company’s assets had been sold off in a transaction that benefited its investors, leaving the firm itself insolvent. With little hope of recovery from the startup, the plaintiff did what plaintiffs have done for centuries: He followed the money.[1]

The lawsuit against Hydrazine invoked a mix of legal theories designed to pull a solvent actor into a dispute that otherwise involved a failed company, including aiding and abetting fraud and civil conspiracy. The case offers a Silicon Valley-specific illustration of a classic litigation dynamic: When a business collapses, plaintiffs rarely limit their sights to the firm and its managers. Instead, they look outward, searching for a deep pocket that might help make them whole.

This dynamic sits uneasily alongside the conventional wisdom about the startup ecosystem. For decades, scholars and practitioners have portrayed Silicon Valley as a low-litigation environment governed largely by reputation, repeat play, and relational contracting rather than formal legal enforcement. Although startups fail all the time, the story goes, lawsuits are rare.[2]

In a new article, we test that conventional wisdom. We examine litigation involving venture capital firms during the “unicorn era,” roughly 2014 through mid-2025, a period defined by so-called unicorns – companies valued at $1 billion or more – and other companies with similarly unprecedented private-market valuations, delayed IPOs, and massive inflows of capital into venture funds. What we find complicates the prevailing narrative. Litigation involving venture capital firms is not ubiquitous, but it is not so rare. Roughly 25 percent of active VC firms in our sample were involved in at least one lawsuit during the period we study.

Litigation Volume Is Steady; Claim Types Are Not

We find that the overall level of litigation against VC firms has risen gradually and roughly tracks venture capital activity. This pattern has held across multiple market cycles, including the 2014-2015 IPO boom and the pandemic-era surge in venture funding.

In this respect, venture capital firms have looked like other deep-pocket defendants in other litigation contexts and have remained consistently attractive litigation targets over our sample period. The total volume of lawsuits has not spiked dramatically in response to scandals,  investor exits, or high-profile judicial decisions. It has simply kept pace with the scale of the industry.

At the same time, the composition of claims has changed dramatically. Securities fraud claims surged after the first IPO boom, then faded. Business-tort claims, such as fraud, unjust enrichment, conversion, tortious interference, rose and fell counter-cyclically. Fiduciary duty claims increased sharply toward the end of our sample, eventually accounting for nearly 40 percent of all VC lawsuits.

This combination – stable litigation pressure paired with volatile claim composition – suggests that misconduct may not be the sole driver of lawsuits against VCs. It seems, rather, that there is a baseline level of litigation in the startup system as  plaintiffs and their lawyers adapt their legal theories and case selection to reach VC firms.

Deep Pockets in a Fragile Ecosystem

Why do venture capital firms attract this kind of persistent litigation? Startups are often cash-strapped and fragile. When they fail, whether through fraud, mismanagement, or bad luck, there may be no meaningful source of recovery left inside the firm. Venture capital funds are often the only solvent, repeat players in the ecosystem.

That structural reality creates a powerful pull toward VC defendants, even when their role in the underlying events is attenuated. Our data show that larger, more established venture firms are  more likely to be sued than smaller or newer ones. Litigation risk, in other words, tracks not opportunism or inexperience, but scale.

Courts Push Back, but Only So Much

Courts are not blind to these incentives. In both federal securities law and Delaware corporate law, judges have spent decades refining doctrines designed to prevent liability from drifting too far from culpability. Several U.S. courts of appeal, for example, require “culpable participation” by control-persons to establish their liability under the federal securities laws. The Delaware Supreme Court has tightened standards for aiding and abetting fiduciary breaches, most notably in its recent reversals of expansive trial-court decisions.

We see evidence that plaintiffs respond quickly to judicial signals, abandoning theories that have become less viable and pivoting toward those that appear newly receptive. The rise and fall of control-person claims, and the brief surge in aiding-and-abetting fiduciary duty claims following permissive Chancery Court decisions, are hard to miss.

But doctrinal tightening does not eliminate litigation pressure. It redirects it.

Business Torts as a Residual Option

Nowhere is this clearer than in the category of business-tort claims. Collectively, fraud, unjust enrichment, conversion, and tortious interference account for roughly one-third of all claims in our sample. These claims receive little attention in corporate law scholarship, yet they play a central role in VC litigation.

Business torts are often counter cyclical to more traditional shareholder litigation claims such as securities fraud and breach of fiduciary duty.  When courts tighten requirements for those traditional claims, business torts tick up.  At first glance, this is somewhat puzzling because business torts are substantively demanding and often difficult to win on the merits. But they are also procedurally permissive. Unlike securities fraud claims, they are not subject to the PSLRA’s discovery stay. Unlike fiduciary duty claims in Delaware, they are not routinely screened through early motions to dismiss with discovery stayed as a matter of course.

As a result, even weak business-tort claims might generate meaningful settlement leverage against a deep-pocket defendant. They require fact-intensive inquiries into intent, reliance, and causation – questions that are hard to resolve without discovery. For plaintiffs facing tightened standards in more traditional shareholder claims, business torts may function as a back-up plan or residual option: a way to keep solvent defendants in the case long enough to extract value.  To the extent business torts function this way, they present a challenge to courts that seek to tighten corporate or securities laws to discourage deep-pocket litigation.

Why This Matters

The venture capital industry occupies a peculiar position in modern corporate law. It is highly influential, yet largely unregulated through traditional disclosure-based regimes. Some commentators might suggest that expanding liability for VCs could improve accountability in opaque private markets.

We are skeptical of this approach. Imposing broad, gatekeeper-style liability on venture capital firms would require a fundamental rethinking of the VC investment model, which is built around portfolio diversification, limited monitoring, preference for high-risk and high-reward strategies, and tolerance for failure. Whatever its flaws, that model has been remarkably successful at supporting innovation.  We think the expert business courts – Delaware Chancery and the U.S. Court of Appeals for the Second Circuit – get it right when they reserve liability for only those VCs that acquire actual control of the startup or engage directly in culpable conduct.

At the same time, we are concerned that the current system is leaky. Even as expert courts tighten substantive doctrines to resist deep-pocket liability untethered from culpability, procedural slack remains. Business-tort claims, in particular, allow litigation pressure to persist in venues and doctrinal categories that lack robust screening mechanisms. The result is a steady litigation risk for venture capital firms that tracks market activity rather than misconduct and falls most heavily on the largest and most established players.

For scholars, the takeaway is that VC litigation deserves closer attention. Much of our intuition about shareholder litigation is drawn from the public-company context, where doctrine and procedure work together to channel claims. That architecture does not exist in the same way for startups and their investors.

Courts and policymakers may face a different challenge. The goal is not to immunize venture capital from lawsuits, but to recognize how deep-pocket dynamics operate in fragmented legal environments, and how easily litigation pressure can migrate when one doctrinal door closes, and another remains ajar.

ENDNOTES

[1] Verified Amended Complaint, Ty Huls v. Teespring, Inc. et. al. (Del. Ch. May 23, 2023).

[2] See, e.g., Vladimir Atanasov, Vladimere Ivanov, Kate Litvak, Does Reputation Limit Opportunistic Behavior in the VC Industry? Evidence From Litigation Against VCs, 67 J. FIN. 2215 (2012); Elizabeth Pollman, Private Company Lies, 109 Geo. L.J. 353, 390 (2020); Elizabeth Pollman, Startup Failure, 73 DUKE L.J. 327, 365-372 (2023) Mark C. Suchman & Mia L. Cahill, The Hired Gun as Facilitator: Lawyers and the Suppression of Business Disputes in Silicon Valley, 21 LAW & SOC. INQUIRY 679 (1996); Verity Winship, Private Company Fraud, 54 U.C. DAVIS L. REV. 663, 707-712 (2020).

Emily Strauss is an associate professor, and Abraham Cable is a professor, at UC Law San Francisco. This post is based on their recent article, “Venture Capital Litigation in The Unicorn Era,” available here.