When Do Venture Capitalists Owe Fiduciary Duties To Their Portfolio Companies?

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In the typical venture-backed company, the Board often includes some members designated by the venture capital firms who are investors in the company. When things go awry, lawsuits often follow, and litigators are left to figure out the contours of the duties that the venture-appointed directors owed to the company and others. Problems for the VC director often arise from the fact that their interests can differ from those of the company in subtle and not-so-subtle ways.

For the most part, of course, the VC firm, its appointed director, and the company all share a common goal: for the enterprise to make enough money for everyone to do well. It's when the enterprise starts to falter that interests may diverge. For example, preferred shareholders (often the VC investors) may want to cut their losses and get some portion of their capital back, while common shareholders usually prefer to hang in there until the bitter end. This puts the VC-appointed director in a tough spot: as a director of the company, s/he likely has fiduciary duties to the entity and the shareholders as a whole (depending on the type of entity and the applicable state law), but as a partner or stakeholder in the VC firm that appointed him, s/he may be inclined to do what works best for the VC firm.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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