New Delhi, October 5: Startups that have independent directors on their board benefit from the mediation role played by them, according to a working paper by Michael Ewens and Nadya Malenko for the US National Bureau of Economic Research. However, they are not legally obliged to have independent directors on their boards.
According to a Livemint report, studying a sample of 7,200 VC-backed startups in the US, the researchers reported that at the first financing, a startup board has three members, with most of the power vested in the entrepreneurs. However, in the successive rounds of financing, the power and control shift from the entrepreneur to the VC.
The authors found out that the board of an average startup has two seats held by VCs, 1.7 by entrepreneurs, and 0.8 by independent directors. As the investors take up the role of monitoring and advisory in startups, the role of the independent directors is more of a tie-breaker in case of disagreement.
However, the authors have also highlighted that this mediating role played by the independent director may not produce the most optimal outcome. It further observed that the bargaining power of VCs in comparison to entrepreneurs in startups has reduced over the course of time due to the deregulation of private equity markets and the entry of non-traditional investors.
