Directors' Fiduciary Duties in a Follow-On Venture Financing

Overview: The article asserts that venture investors and companies in this all-too-common situation often fail to fully appreciate the actionable conflicts of interest that can arise in a follow-on financing. First round financing negotiations do not usually involve conflicts of interest because new investors generally owe no fiduciary duties to the company in which they invest they are at arms' length from one another. Follow-on rounds of financing, however, involve conflicts of interest not present in first round negotiations. These conflicts result from the fact the VC-appointed directors essentially stand on both sides of the transaction. Recent market conditions have severely restricted companies' access to capital, leaving many venture-backed companies with no real option other than negotiating with their existing investors for follow-on financing. Given the enormous amount of advantage these investors typically have over the companies, the reality is that the investors may be able to effectively dictate the terms of the financing. Nevertheless, the duties imposed upon corporate directors make it advisable that investor-appointed directors tread carefully in negotiating follow-on financing to minimize the possibility that the corporation or shareholders will later challenge their conduct.

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Format: HTML | Size: 103KB | Date: Jan 2002 | Pages: 8