Yifat Aran & Nizan Geslevich Packin, Due Diligence Dilemma, 2025 U. Ill. L. Rev. (forthcoming 2025).
This Article examines venture capital (“VC”) due diligence practices in the wake of FTX’s collapse and a broader rise in startup fraud. It introduces the “due diligence dilemma”: a core tension between the imperative to invest rapidly and the widespread, yet often unfulfilled, expectation that VC firms serve as effective gatekeepers through independent diligence. The Article argues that this dilemma is exacerbated by cyclical market conditions, which give rise to a collective action problem. Individual VC firms are incentivized to expedite investments and rely on others’ diligence efforts in order to maintain a founder-friendly reputation. The result is “proxy due diligence”—a practice of inferring trustworthiness from the presence of other reputable investors rather than conducting independent verification. While this approach may be rational for VC firms and their limited partners—who can hedge against failure through portfolio diversification—it can result in real harms to employees, customers, and other stakeholders who treat VC investment as a proxy for reliability. The Article suggests that the current legal framework, which primarily depends on private ordering between sophisticated private parties, may not adequately address these wider implications. The Article explores potential legal and regulatory responses, ranging from enforcement actions to more prescriptive due diligence requirements, and concludes by addressing the fundamental question underlying this discussion: are the potential impacts on uninvolved parties simply an unavoidable trade-off for innovation-driven economic growth, or might carefully designed policy interventions encourage venture capital firms to consider the wider social implications of their investment and oversight decisions? Article Link.
Elizabeth Pollman & Yifat Aran, Ousted, 25 Theoretical Inquiries L. 231 (2024).
Founder-CEOs may hold power in a corporation in myriad ways: through managerial control, by designating seats on the board, or by holding significant voting power, which can be amplified by dual-class structures with superior voting rights. The debate on control mechanisms such as dual- and multi-class stock structures, as well as concomitant concerns about the cult of founder-CEOs and their grip on managerial power, have been a central theme of corporate law and governance in an era of “founder-friendly” startup governance and tech company dominance of markets. Amid the twists and turns of this debate, we observe that a small but important point is missing: a substantial number of founder-CEOs have been ousted—forced or pushed to step down from the CEO role despite maintaining important indicia of control that, according to prevailing theory, empowers them to withstand such pressures.
We argue that a variety of countervailing forces and factors can work to limit the durability of a founder-CEO’s power and may ultimately lead to their resignation under pressure even though they may hold significant or even controlling voting power. Among these forces are performance problems or poor financial position of the company or its stock value, legal concerns, employee and public pressure, as well as personal motivations and struggles. A founder-CEO who faces strong opposition and adverse effects on the company’s performance is often better off stepping down than attempting to maintain managerial control. Further, we explore the limits of these forces on powerful founder-CEOs—they can only do so much to serve as guardrails against voting control and they exist in a particular moment. Ousting can be temporary, and founder-CEOs can find their way back to the throne or see a rebirth in new ventures. Finally, we examine how an appreciation of these forces and their limits can shed new light on why public investors might be willing to accept multi-class structures in venture-backed startup IPOs. Article Link.
Yifat Aran, The Start-up Law of the Start-up Nation, 52 Heb. U. L. Rev. (Mishpatim) 115 (2025).
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. Article Link.
Yifat Aran, Making Disclosure Work for Start-Up Employees, 2019 Colum. Bus. L. Rev. 867 (2019).
Equity-based compensation of startup employees is attracting growing and skeptical attention in academia and the media. Legal and finance scholars have raised concerns that employees are misinformed regarding the value of their equity grants in a manner that could distort their employment and investment decisions. This Article addresses these emerging concerns by articulating a theoretical and practical framework for the regulation of start-up employees’ human capital investments. This framework balances the confidentiality interests of employers with employees’ need for ongoing and realistic valuation of the return on their labor.
Start-ups commonly rely on Rule 701 of the Securities Act to grant equity-based compensation to their employees without registering these securities with the Securities and Exchange Commission. This Article describes the flaws of the current regulation and proposes concrete amendments including (1) replacing the requirement to disclose the issuer’s financial statements with a requirement to disclose fair market valuation and exit waterfall analysis; (2) changing the threshold that triggers the enhanced disclosure requirement from when the company issues equity-based compensation exceeding $10 million within a twelve-month period, to when the company issues securities to at least 100 employees, and these securities aggregately convey over 10% ownership in any class of shares; and (3) advancing the timing of the disclosure from its current post-employment stage to the offer letter stage. Article Link.
Yifat Aran, Note, Beyond Covenants Not to Compete: Equilibrium in High-Tech Startup Labor Markets, 70 Stan. L. Rev. 1235 (2018).
The literature analyzing the relationship between enforceability of covenants not to compete and the success of Silicon Valley is incomplete. The microstructure of the employee stock options market, combined with California’s strong public policy against noncompete enforcement, creates an equilibrium in which employees at less successful firms can move to competitors at little or no cost, but valuable employees of successful private firms are, practically, handcuffed just as if they were subject to a powerful noncompete. This limitation on employee mobility is removed once the company holds a liquidity event, such as an initial public offering or acquisition, allowing its entrepreneurial talent to transition to other companies or start new ones.
This Note argues that this narrowly tailored retention function provides a more compelling explanation for Silicon Valley’s success than does an explanation that has become popular among policymakers in recent years: the unenforceability of noncompetes as the sole factor. This Note further suggests that companies’ current tendency to delay liquidity events, a tendency facilitated by recent changes in the private capital market and the securities regulatory environment, might overly restrict employee mobility and impair the efficient allocation of talent that characterized Silicon Valley for many years.. Article Link.
Yifat Aran and Raviv Murciano-Goroff, Equity Illusions 41(1) The Journal of Law, Economics, and Organization (2025)
Although equity-compensation grants for rank-and-file employees are common in startups and are considered an ingrained part of their business culture, little is known about how employees approach this form of compensation. We begin filling this gap by examining employees’ financial literacy regarding equity compensation and their willingness to forgo cash compensation for startup equity. Using a survey and a combination of natural language processing and machine learning techniques with conventional regression modeling, we find that employees commonly respond to economically irrelevant signals and misinterpret other important signals. The findings suggest that employees harbor a range of “market illusions” regarding startup equity that can lead to inefficiencies in the labor market, which sophisticated employers can legally exploit. The results raise questions about the protection of employees in their investor capacity in a market where highly sophisticated repeat players, such as venture capital investors, interact with unorganized and uninformed retail investors. Article Link.
Yifat Aran, The RSU Time Bomb: Regulating Startup Equity Compensation in the Unicorn Era, in Research Handbook on the Structure of Private Equity and Venture Capital (Brian J. Broughman & Elisabeth de Fontenay eds., 2024) (Edward Elgar Publ'g).
This chapter explores the evolving landscape of startup equity compensation in Silicon Valley, with a focus on Restricted Stock Units (RSUs). Specifically, it details the risks related to double-trigger RSUs, a prevalent form of equity compensation among high-value private companies, or 'unicorns.' As these companies continue to delay their public offerings, their employees' hard-earned and often highly valuable RSUs are increasingly in danger of expiring before they can be settled for shares.
The chapter makes three contributions: First, it introduces a new perspective to the debate on unicorn governance by focusing on the issue of nearly-expiring RSUs, highlighting the risks startup employees face amid prolonged illiquidity. Second, the chapter places this issue within the wider context of startup equity compensation practices. It links current RSU challenges to the historical development of startup equity compensation and the deregulation of private capital markets, illustrating the interconnectedness of these factors and how deregulation has increasingly shifted risks from startups to their employees. This analysis illuminates the often-ignored impact of human capital considerations on the dynamics of private capital markets and the timing of tech IPOs. Third, the chapter proposes potential solutions to these challenges, focusing on the Israeli legal framework for startup equity compensation. It explores avenues for tax reform, such as the implementation of a trust mechanism that minimizes tax pitfalls for employees, as well as corporate and securities law concerns surrounding equity compensation. Article Link.
Yifat Aran & Moran Ofir, The Effect of Specialised Courts over Time, in Time, Law and Change: An Interdisciplinary Study (Sanne Taekema, Sofia Ranchordás & Yaniv Roznai eds., Hart Publ'g 2020).
This chapter examines the effect of creating a specialised economic court on subsequent litigation rates, forum selection, and court performance. To do so, we utilized a quasi-experimental research design and compared court decisions under two time frames: before and after the reform, and two judicial frameworks: the specialised court vs. generalist courts. Using a unique data from Israel, where an Economic Division within the Tel Aviv District Court was established in the last decade, we find evidence that specialisation fosters a fast development of a coherent and consistent body of law. This effect is driven by fast adjudication and by judges' relying on each other’s past decisions to jointly develop the case law. Importantly, although increased efficiency was not exclusively related to specialisation, further analysis suggests that the specialised division is more capable of managing a particularly time-consuming docket. Lastly, although the reform did not lead to the initiation of a greater number of lawsuits, it did cause a major shift in forum selection. We conclude that specialisation may be especially productive in developing markets like Israel, where the use of private lawsuits to promote investor protection is relatively new and growing rapidly. Article Link.
Yifat Aran, Brian J. Broughman & Elizabeth Pollman, CEO Turnover in Dual-Class Firms, U. Pa. Inst. for L. & Econ. Rsch. Paper No. 24-38 (Dec. 18, 2024).
In recent years, an increasing percentage of tech companies have gone public with a dual- class structure, where founders hold high-vote stock. Commentators argue that this entrenches founder-CEOs, allowing them to retain power long after the IPO. We examine a sample of U.S. VC-backed firms that went public from 2002 to 2020. Our time-to-event analysis finds that CEOs of dual-class firms have a median post-IPO tenure of 6.6 years, compared to 4.3 years for a matched sample of single-class firms. While this supports concerns of CEO entrenchment, the difference is largely due to a higher rate of M&A sales involving single-class firms. Excluding M&A-related turnover, there is no significant difference in CEO tenure, challenging the view that dual-class structures shield underperforming CEOs from internal pressure to step down. Furthermore, poor shareholder returns frequently precede turnover of dual-class CEOs, and news coverage often mentions poor firm performance as a reason for the change. Most dual-class turnovers occurred well before any sunset clauses were triggered, calling into question the focus on this governance mechanism. Article Link.