Board dynamics over the startup life cycle

Michael Ewens, Nadya Malenko 08 August 2020



There is an active policy debate on the ongoing decline in publicly traded firms and an increase in the number of privately held firms. According to US Securities and Exchange Commission Chairman Jay Clayton, “the reduction in the number of US-listed public companies is a serious issue for our markets and the country more generally” (Clayton 2017).

Given this changing composition of the universe of companies, it is important to understand the management and governance of private firms. This is especially relevant considering recent scandals tied to corporate governance failures at Theranos, Uber, and WeWork.

A key aspect of corporate governance is the composition and organisation of the board of directors. The board has ultimate decision-making authority over significant corporate matters. While the literature has explored the composition of public-firm boards (Adams et al. 2010), we know comparatively little about the boards of private firms. In contrast to the public-firm board that is governed by an extensive set of regulations, the flexibility available to the private-firm board leaves open the possibility that its composition and dynamics play a relatively larger role in firm outcomes.

The goal of our recent paper (Ewens and Malenko 2020) is to study the venture-capital-backed startup board and its evolution from the first round of financing to exit. We examine the determinants of board composition across firms and over time, the allocation of control over the board, and the roles of independent directors, i.e. directors who are neither representatives of the venture capitals nor founders.

The venture-capital setting is an intriguing area to investigate the board of directors because investors play an active role in their investments and their board positions are often central to exerting power (Lerner 1995, Kaplan and Stromberg 2003). However, there is little evidence both on the director composition – entrepreneur, venture capital, and independent – and on how the balance of power on the board changes over the startup’s life.

To study these questions, we build a novel dataset of the boards of venture-capital-backed startups by merging two data sources: Form D filings on SEC EDGAR and VentureSource. The resulting sample covers 7,201 startups over 2002–2017.

The dynamics of board size and composition reveal the evolution of control over the startup life cycle. At first financing, the average board has 3.6 members, and control over the board is most frequently allocated to the entrepreneurs/executives. As the startup grows and raises capital, it adds both venture-capital investors and independent directors. The average board size across a firm’s life is 4.4, with approximately 2 seats held by venture capitals, 1.7 by executives, and 0.8 by independent directors.

Figure 1 Average board seat count and composition by age

Board composition and the allocation of board control also exhibit interesting dynamics over the last two decades. Venture-capital control over startup boards has been steadily declining: the fraction of startups in which venture capitals controlled the majority of board seats after the second financing round was about 60% for startups originated in 2002, but fell to about 25% for startups originated in 2013. Not only venture-capital control but even the presence of venture-capital investors on startup boards has been declining. This trend has been accompanied by an increasing fraction of boards controlled by entrepreneurs.

Figure 2 Percent of firms with venture capital and entrepreneur control by financing round over time

Finally, although the presence of independent directors is not required by law, it is widespread: the fraction of startups that had an independent director by their fourth round of financing is 63%. Moreover, in 33% of cases, neither the venture capitals nor the entrepreneurs control the majority of seats on the board, so whenever these two parties disagree, independent directors play a tie-breaking role and thus have substantial power over board decisions. We refer to such allocation of control as ‘shared control’.

Independent directors on startup boards are interesting for two reasons. First, unlike in public firms, their presence is voluntary and guided by the value they can create and the roles they can play for the startup. Second, the traditional monitoring role for independent directors of public firms is less important in venture-capital-backed startups because venture-capital investors have both the time and powerful incentives to monitor the managers of their portfolio companies.

To understand the time-series trends and the dynamics of startup board composition, we investigate which factors determine the allocation of board control and the roles that independent directors play. In particular, we examine the previously under-explored role of independent directors, which has been proposed in the law literature (Broughman 2010) – the ‘mediation’ role. Here, independent directors can help resolve (mediate) disagreements between venture-capital investors and entrepreneurs on the board, which are likely to arise for decisions involving subsequent rounds of financing, delayed exits, the sale of the firm, or CEO replacement, and the firm’s response to negative shocks.

Allocating the tie-breaking role to independent directors offers a commitment to both the venture capital and the entrepreneur to refrain from opportunistic behaviour in such situations, which can increase both ex-post and ex-ante efficiency. Such commitment would be impossible to achieve if one of the parties had full control over the board.

We predict that whether giving a tie-breaking role to independent directors is optimal depends on the stage of the firm life cycle and the allocation of bargaining power between the entrepreneurs and venture capitals. First, within a startup life cycle, as the cumulative amount of capital contributed by the venture capitals increases, control over the board should optimally shift from entrepreneur control at early stages of financing, to shared control at intermediate stages, and to venture capital control at later stages.

This is exactly the pattern observed in the data: conditional on a change in board control from one year to the next, entrepreneur control is 70% likely to switch to shared control, and shared control is 85% likely to switch to venture-capital control. For example, after the first round of financing, almost half of our sample firms have entrepreneur-controlled boards. After the second financing round, shared control and venture-capital control are the two most common arrangements. Finally, in the fourth round of financing, venture-capital control is most common (63% of the sample), with the average firm having 53% of seats controlled by the venture capitals.

Second, across firms, for any given point in the startup life cycle, we expect the allocation of control to move from entrepreneur control to shared control, and then to venture capital control as the venture capital’s bargaining power relative to the entrepreneur increases. We proxy for the venture capital’s relative bargaining power with the average venture-capital investors’ equity stakes in firms within the same industry in the previous year. This measure captures venture capitals’ bargaining power in negotiations over the firm’s valuation.

Consistent with the above prediction, there is a monotonic negative (positive) relation between entrepreneur control (venture-capital control) over the board and the venture-capital bargaining-power proxy. Both the within-firm and the cross-sectional results are robust to a more conservative definition of independent directors, which treats directors with prior professional ties with the venture capital or the entrepreneur as being affiliated with that party and only considers unconnected directors as truly independent.

Finally, the time-series trends in the allocation of board control are also broadly consistent with hypotheses regarding the role of mediation. Prior literature has identified two important changes to the supply of private equity capital over the last decades. The first was the deregulation of private equity markets, which made it easier for both startups and the private funds investing in them to raise capital (Ewens and Farre-Mensa 2020).

The second has been the growth in direct private equity investments by non-traditional investors, such as sovereign wealth funds, mutual funds, and hedge funds (e.g. Fang et al. 2015, Chernenko et al. 2017). These changes have increased the supply of private capital and, as a result, the bargaining power of startup founders vis-a-vis venture-capital investors.

In addition, technological advancements, such as the advent of Amazon’s Web Services in 2006, decreased the costs of starting new businesses and thereby lowered the capital contributed by venture capitals in early stages (Ewens et al. 2018). Both the reduction in venture-capital bargaining power due to greater availability of private capital and the reduction in venture-capital investments predict lower venture-capital control and higher entrepreneur control over the board, which is exactly what we observe in the data.

Concluding remarks

Our work presents novel evidence about the composition and evolution of startup boards. We examine which factors correlate with the allocation of control between entrepreneurs and venture capitals, identify an important new role of independent directors, and document a steady trend toward more entrepreneur control over the board.

These findings contribute to our understanding of corporate governance of privately held firms, which is important in light of the steady increase in the number and proportion of private firms and the recent corporate-governance scandals at such firms.


Adams, R B, B E Hermalin and M S Weisbach (2010), “The role of boards of directors in corporate governance: A conceptual framework and survey”, Journal of Economic Literature 48: 58–107.

Broughman, B J (2010), “The role of independent directors in startup firms”, Utah Law Review 461.

Chernenko, S, J Lerner and Y Zeng (2017), “Mutual funds as venture capitalists? Evidence from unicorns”, working paper.

Clayton, J (2017), “Remarks at the Economic Club of New York”, 12 July.

Ewens, M, and J Farre-Mensa (2020), “The deregulation of the private equity markets and the decline in IPOs”, The Review of Financial Studies, forthcoming.

Ewens, M, and N Malenko (2020), “Board dynamics over the startup life cycle”, working paper.

Ewens, M, R Nanda and M Rhodes-Kropf (2018), “Cost of experimentation and the evolution of venture capital”, Journal of Financial Economics 128: 422–42.

Fang, L, V Ivashina and J Lerner (2015), “The disintermediation of financial markets: Direct investing in private equity”, Journal of Financial Economics 116: 160–78.

Kaplan, S N, and P Stromberg (2003), “Financial contracting theory meets the real world: An empirical analysis of venture capital contracts”, The Review of Economic Studies 70: 281–315.

Lerner, J (1995), “Venture capitalists and the oversight of private firms”, The Journal of Finance 50: 301–18.



Topics:  Productivity and Innovation

Tags:  board of directors, boards, corporate governance, directors, entrepreneurs, private firms, venture capital

Professor of Finance and Entrepreneurship, Caltech

Associate Professor of Finance, University of Michigan, Ross School of Business


CEPR Policy Research