The Role of Independent Directors in Startup Firms

In this paper, I propose a new theory to explain the governance role of independent directors in startup firms financed by venture capital. Independent directors are frequently used in VC-backed firms, and typically occupy a tiebreaking seat on the board. This practice cannot be explained by the existing theory of independent directors. The current corporate governance literature, which relies on diffuse ownership and passive investment to explain the presence of independent directors on public boards, cannot explain their presence on private startup boards.

Indeed, unlike public companies, private startup firms have concentrated ownership structures, and their investors actively participate in managing the company.