Darian M Ibrahim

Debt as Venture Capital

Darian M. Ibrahim — Wed, 09 Sep 2009 18:50:11 PDT

Venture debt, or loans to rapid-growth start-ups, is a puzzle. How are start-ups with no track records, positive cash flows, tangible collateral, or personal guarantees from entrepreneurs able to attract billions of dollars in loans each year? And why do start-ups take on debt rather than rely exclusively on equity investments from angel investors and venture capitalists (VCs), as well-known capital structure theories from corporate finance would seem to predict in this context? Using hand-collected interview data and theoretical contributions from finance, economics, and law, this Article solves the puzzle of venture debt by revealing that a start-up’s VC backing and intellectual property substitute for traditional loan repayment criteria and make venture debt attractive to a specialized set of lenders. On the firm side, venture debt helps entrepreneurs, angels, and VCs avoid dilution, improves VC internal rate of return, assists VCs in monitoring entrepreneurs, and follows from capital structure theories after the first round of VC funding.

Financing the Next Silicon Valley

Darian M. Ibrahim — Sun, 01 Mar 2009 08:33:04 PST

Silicon Valley’s success has led other regions to attempt their own high-tech transformations, yet most imitators have failed. Entrepreneurs may be in short supply in these “non-tech” regions, but some non-tech regions are home to high-quality entrepreneurs who relocate to Silicon Valley due to a lack of local financing for their start-ups. Non-tech regions must provide local finance to prevent entrepreneurial relocation and reap spillover benefits for their communities. This Article compares three possible sources of entrepreneurial finance – private venture capital, state-sponsored venture capital, and angel investor groups – and finds that angel groups have distinct advantages when it comes to funding innovation in non-tech regions. This entrepreneurial finance story is then supplemented by a “law and entrepreneurship” story – specifically, a look at securities laws that might impede optimal levels of angel group financing.

Entrepreneurs on Horseback: Reflections on the Organization of Law

Darian M. Ibrahim — Tue, 12 Aug 2008 13:38:07 PDT

“Law and entrepreneurship” is an emerging field of study. Skeptics might wonder whether law and entrepreneurship is a variant of that old canard, the Law of the Horse. In this Essay, we defend law and entrepreneurship against that charge and urge legal scholars to become even more engaged in the wide-ranging scholarly discourse regarding entrepreneurship. In making our case, we argue that research at the intersection of entrepreneurship and law is distinctive. In some instances, legal rules and practices are tailored to the entrepreneurial context, and in other instances, general rules of law find novel expression in the entrepreneurial context. As a result, studying connections between law and entrepreneurship offers unique insights about them both.

Individual or Collective Liability for Corporate Directors?

Darian M. Ibrahim — Thu, 16 Aug 2007 09:21:03 PDT

Fiduciary duty is one of the most litigated areas in corporate law and the subject of much academic attention, yet one important question has been ignored: Should fiduciary liability be assessed individually, where directors are examined one-by-one for compliance, or collectively, where the board’s compliance as a whole is all that matters? The choice between individual and collective assessment may be the difference between a director’s liability and her exoneration, may affect how boards function, and informs the broader fiduciary duty literature in important ways. This Article is the first to explore the individual/collective question and suggest a systematic way to approach it. This Article offers both a descriptive examination of how some courts have answered this question (often implicitly), and a normative analysis asking whether the courts’ tentative answer makes for good corporate governance policy.

The (Not So) Puzzling Behavior of Angel Investors

Darian M. Ibrahim — Mon, 13 Aug 2007 21:59:35 PDT

Angel investors fund start-ups in their earliest stages, which creates a contracting environment rife with uncertainty, information asymmetry, and agency costs in the form of potential opportunism by entrepreneurs. Venture capitalists also encounter these problems in slightly later-stage funding, and use a combination of staged financing, preferred stock, board seats, negative covenants, and specific exit rights to respond to them. Curiously, however, traditional angel investment contracts employ none of these measures, which appears inconsistent with what financial contracting theory would predict. This Article explains this (not so) puzzling behavior on the part of angel investors, and also explains the recent move toward venture capital-like contracts as angel investing becomes more of a professional endeavor.