Elizabeth Pollman and Yifat Aran: Ousted, Startup Failure and Equity Compensation in the Unicorn Era.
Boardroom Governance with Evan Epstein
The Evolution of Equity-Based Compensation and the Rise of Private Markets
This chapter explores the evolution of equity-based compensation in Silicon Valley and the consequences of companies staying private for longer. It discusses the conditions for granting RSUs in private companies and their implications for unicorns. The chapter also delves into the importance of the private market for venture-backed startups and its relationship with the public market.
(0:00) Intro.
(1:28) About the podcast sponsor: The American College of Governance Counsel.
(2:15) Start of interview.
(3:16) Yifat's "origin story."
(6:20) Yifat's bio and positions at the University of Haifa and Technion - Israel Institute of Technology.
(8:00) About Elizabeth Pollman, Professor at the Penn Carey Law School at the U. of Pennsylvania.
(9:57) About their article, Ousted (2023).
"We use that term broadly to refer to being forced or pushed to step down from the CEO role, specifically that managerial role, despite having significant control. And what we're arguing is that there's a whole bunch of countervailing forces and factors that can work to limit the durability of the founder CEO's power and ultimately can lead to them resigning from that managerial role."
(11:58) Examples of countervailing forces and factors to the founder/CEO power. Differences between public and private companies. Influence of voting rights.
(15:20) Influence of margin loans (backed by founder stock) and secondary sales in corporate governance. *Reference to E41 with Maureen Farell on Cult of We (Aug 2021).
(19:31) Conflict with regulators, investors and other stakeholders (example: Uber). *Reference to Elizabeth Pollman's article on Regulatory Entrepreneurship.
(22:19) On employee pressure in corporate governance.
(23:00) On OpenAI's board debacle (involving Sam Altman's ouster and reinstatement).
(29:31) Other founder/CEO cases referenced in Ousted. *Mention of E64 with Keir Gumps, involved in Uber's governance clean-up. Cases of Elizabeth Holmes (Theranos) and Sam Bankman-Fried (FTX). On externalities from lack of corporate governance in startups, particularly unicorns. The impact of the Power Law in VC-backed companies.
(36:26) Take-aways from their article Ousted. Gap between academia and practice.
(40:04) Elizabeth Pollman's article Startup Failure. *Reference to E3 with Elizabeth Pollman on Startup Governance and Regulatory Entrepreneurship (May 2020).
"[I]t's really important that law and culture facilitate the efficient flow of the failure of venture-backed startups and that failed startups can do so with honor because that's what sustains our system in a big way, out of which comes these few successes.
But we also have to have a way of dealing with lots of failed startups (ie. M&A, acquihires, ABCs, and liquidation)."
*Reference to my newsletter describing a time of "downrounds, shutdowns and recaps" on a monthly basis.
(44:28) Yifat Aran's article The RSU Time Bomb: Regulating Startup Equity Compensation in the Unicorn Era. Triggered by Stripe's downround in March 2023 (raising $6.5 billion at $50 billion valuation).
(52:51) On current equity compensation practices and the private/public market divides.
(54:51) Consequences of startups staying private for longer (SPL) or forever.
- Rapid fire questions for Yifat Aran:
(58:31) Books that have greatly influenced her life:
- The Death of Ivan Ilyich by Leo Tolstoy (1886)
(59:56) Her mentors:
- Dorit Beinisch (Former President of the Supreme Court of Israel)
- Joe Grundfest, Stanford Law School.
- Elizabeth Pollman, Penn Carey Law School.
(01:02:30) Quotes that she thinks of often or lives her life by: "I believe that you can achieve everything, but you aren't likely to achieve everything at the same time."
(01:03:13) An unusual habit or absurd thing that she loves: chic flicks and gummy bears to write papers.
(01:03:46) A living person she admires: Arthur Rock.
Elizabeth Pollman is a Professor of Law and the Co-Director of the Institute for Law & Economics at the University of Pennsylvania Carey Law School. She teaches and writes in the areas of corporate law and governance, as well as startups, venture capital, and entrepreneurship.
Yifat Aran is an Assistant Professor of Law at the University of Haifa. She is also a lecturer in the MBA program at the Technion, Israel Institute of Technology, and a research fellow at the Rutgers Institute for the Study of Employee Ownership and Profit Sharing. She is primarily interested in corporate law and governance and securities regulation, with a focus on venture capital and entrepreneurship.
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This podcast is sponsored by the American College of Governance Counsel.
You can follow Evan on social media at:
X: @evanepstein
LinkedIn: https://www.linkedin.com/in/epsteinevan/
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Music/Soundtrack (found via Free Music Archive): Seeing The Future by Dexter Britain is licensed under a Attribution-Noncommercial-Share Alike 3.0 United States License
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