Yifat Aran, JSD

Yifat Aran, JSD

Assistant Professor of Business Law

Haifa University

Biography

I am an Assistant Professor of Law at the University of Haifa. I am 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.

I am primarily interested in corporate law and governance and securities regulation, with a focus on venture capital and entrepreneurship. While corporate law literature focuses mainly on public corporations and markets, venture-backed firms account for an increasingly large share of overall economic activity. Considering this long-term trend, my scholarship examines how legal conditions facilitate the growth of these companies and the distribution of wealth they produce. As part of my research, I explore the relationship between venture capital and human capital investments, in an attempt to redefine the boundaries between corporate and securities law, on the one hand, and labor law, on the other hand.

Education

  • JSD in Law, 2020

    Stanford University

  • JSM, 2015

    Stanford University

  • LLM, 2014

    Hebrew University

  • LLB, 2010

    Hebrew University

Interests

  • Corporate Law & Governance
  • Securities Regulation
  • Law & Entrepreneurship
  • Venture Capital

Publications

The Startup Law of the Startup Nation

Israel is known as the “start-up nation”. Israeli start-ups raise billions of dollars in venture capital each year and form the lifeblood of Israel’s high-tech economy. However, the ever-growing importance of start-ups in the global and Israeli economies still awaits appropriate academic attention. In Israel, as elsewhere, the corporate law literature focuses almost exclusively on public companies. This article takes a first step towards addressing this omission. The article (1) discusses the unique characteristics of venture capital-backed companies as organizations that enable collaboration between venture capitalists and human capital providers; (2) explains how these characteristics are reflected in the corporate governance of start-ups; and (3) illustrates the argument by commentating on decisions by Israeli courts concerning start-up shareholder disputes. The article presents two main contributions. First, it argues that start-ups do not fit either the classic principal-agent theory of corporate law or the team production theory of corporate law as sole explanations. Instead, it proposes a synthesis of these two dominant models of corporate governance, namely “team production by joint ownership”. Several implications of the theory are discussed, including the content of fiduciary duties and corporate purpose. I also argue that this refined view of start-up governance explains the Delaware courts’ approach to corporate governance of start-ups more eloquently than other theories. Second, the article illustrates that Israeli courts tend to apply assumptions and precedents that arise from mature companies to start-ups without discussing the need to distinguish the circumstances. Consequently, there are discrepancies between common norms and culture in venture capital-backed companies and the development of Israeli case law. The article warns that if this trend continues, it may cause a rift between law in books and law in action with regard to start-ups and venture capital. The article concludes with recommendations for improving the situation, including the use of court-appointed experts with specific expertise in venture capital finance and strengthening legal education in start-up law.

Beyond Covenants Not to Compete: Equilibrium in High-Tech Startup Labor Markets

The paper examines an understudied aspect in the literature on employee mobility and innovation—the impact of employee stock options on talent allocation. My research reconciles between two schools of thought regarding noncompete agreement by highlighting the role of Silicon Valley’s business norm of granting stock options to virtually all employees. This custom emerged during Silicon Valley’s inception as an alternative model to the more centralized and hierarchical organizational culture of East Coast corporate America, which held that companies should reserve equity grants solely to senior management. My work suggests that Silicon Valley start-ups can capture the returns on their investments in training and innovation despite California’s ban on noncompetes because stock options generate a retention incentive that offsets employees’ incentive to free ride on these investments. However, unlike noncompete agreements, stock options induce retention in a highly selective manner: they temporarily suppress the mobility of employees of successful private companies (because, due to tax considerations, employees holding valuable options wait for a liquidity event, such as an initial public offering or acquisition, to cash out), but they do not limit the earning potential and mobility of laid-off employees and of employees of unsuccessful companies (whose stock options are virtually worthless). Stock options thus create an efficient breach mechanism that channels employees of less successful firms toward more promising ones and prevents inefficient retention. The paper also explores the crucial role of liquidity in the constant development of start-up ecosystems. Due to the retention effect of valuable but illiquid equity grants, I argue that companies’ current tendency to delay holding liquidity events might overly restrict the mobility of employees of large private companies and impair the talent allocation mechanism that gave Silicon Valley its competitive edge.

Work in progress

Equity Illusions

Equity compensation grants for rank-and-file employees are common among venture-backed start-ups and are considered an ingrained part of their business culture. However, extremely little is known about start-up employee equity holders. This article takes a first step toward filling this gap. More than 1,000 U.S. employees with a college-level STEM degree participated in a survey experiment. Through the combination of natural language processing and machine learning techniques with conventional regression modeling, we examine employees’ financial literacy regarding equity-based compensation and their willingness to forego cash compensation for start-up equity. The findings indicate that employees commonly respond to economically irrelevant signals and misinterpret other important financial signals. Thus, respondents demonstrated a greater demand for equity grants when the number of shares offered was relatively large, even though the ownership percentage was fixed. This tendency is associated with low level of financial literacy regarding equity-based compensation as measured by a three-item test developed in this study. The findings suggest that employees harbor a range of “market illusions” regarding start-up equity that can lead to inefficiencies in the labor market and that sophisticated employers can legally exploit. The study’s results raise serious questions about the protection of employees in their investor capacity in a market in which highly sophisticated repeat players—namely, venture capital and other private equity investors—interact with unorganized and uninformed retail investors.

Contact

  • Abba Khoushy Ave 199, Haifa, 3498838