Navigating the Exit: Fiduciary Duties in Private Company Liquidity Events

Introduction

Venture-backed companies play an essential role in the United States economy and in driving innovation.  Liquidity events for these firms are vital for rewarding investors and employees.  In going-public events, they also allow the broader market to share in the value created by venture-backed companies. 

At the same time, a liquidity event can, in various circumstances, expose inherent tensions latent in a startup’s capital structure. Multiple series of preferred stock, negotiated control rights, and liquidation preferences allocate economic returns—actual or potential—unevenly among stockholders.1 When a company is sold, recapitalized, taken public, or wound down, those contractual features determine who receives value (or not) and how much.

Delaware law, which governs the large majority of venture-backed companies in the United States, provides the throughline. Directors owe fiduciary duties of care and loyalty to the corporation and its stockholders. Under Delaware law, preferred rights are contractual and must be enforced as written. When interests diverge among stockholder classes or series, and a company is solvent, directors must act loyally and in good faith for the benefit of the corporation and its residual equity—which Delaware case law defines as the common stock.  Accordingly, preferred rights do not redefine fiduciary obligations.

This article examines how those principles operate in practice across the corporate lifecycle. Part I describes the governance architecture of venture-backed companies and the friction that can be created by dual fiduciaries and liquidation preferences. Part II analyzes M&A inflection points and the horizontal conflicts they produce. Part III considers public market transitions, including direct listings and de-SPAC mergers, and the accompanying governance pressures that can arise. Part IV examines fiduciary duties in distress and failure, from formal insolvency to out-of-court wind-downs. Part V concludes by offering thoughts on how boards can manage risk while honoring both contractual and fiduciary duty.

I.    The Structural Conflicts of Venture-Backed Governance

Venture-backed companies are built on privately ordered structures that allocate risk and return differentially among stockholder classes, at least for an array of potential circumstances.2 Delaware corporate law, however, is grounded in the objective of maximizing the long-term value of the corporation for the benefit of its stockholders.3 In venture-backed companies, those two frameworks inevitably intersect. This structural conflict is most visible in board deliberations over liquidity events, where directors must navigate dual loyalties and valuation complexities.

A.   The Dual Fiduciary “Problem”             

The board composition of a venture-backed company typically reflects bargained-for governance rights. It is composed of founders, management, representatives of venture capital (VC) funds, and, for many companies, independent directors.4 The VC-appointed directors occupy a precarious legal position known as the “dual fiduciary.”5 They owe fiduciary duties to the portfolio company on whose board they sit. At the same time, they owe duties to the limited partners of the funds they manage.

In periods of growth and in many corporate decisions, the interests of these constituencies are generally aligned. When enterprise value exceeds aggregate liquidation preferences, all equity holders benefit. The fiduciary objective to maximize corporate value is congruent with fund-level objectives.6 That alignment can dissipate when a company faces a down-round financing, a sale at a price insufficient to clear all preferences or return proceeds to the common stock, or a distressed wind-down. In these scenarios, the discord lies horizontally among the stockholders themselves, rather than vertically between stockholders and management.7

This discord stems from the capitalization itself. Venture financing often involves a multi-class and -series capital structure where founders and employees hold common stock. Investors, by contrast, acquire convertible preferred stock carrying liquidation preferences, anti-dilution protections, dividend preferences, director election rights, and other entitlements.8 These contractual rights are bargained for—and enforceable.9 But they do not, under Delaware law, redefine corporate fiduciary duties.

Delaware courts have closely scrutinized these issues. When the interests of preferred and common stockholders diverge, directors must evaluate the transaction from the perspective of the corporation and its residual claimants.10 Under Delaware law, where a company is solvent, the residual claimants are common stockholders.11 That does not mean that directors should disregard preferred rights, which are contractual and enforceable as such.12 Boards may—and must—consider preferred investors’ rights in their decision-making process.13 In the end, however, the Delaware courts have concluded that the rights of preferred stockholders are contractual in nature—at least where the transaction in question is addressed by the preferred stock terms—and the benefit of fiduciary duties runs to the common stockholders. 

Accordingly, if conflicted directors allow those contractual rights, or their fund-level interests, to dictate the outcome without equivalent treatment for the common stockholders and appropriate safeguards, they risk entire fairness review in the event of litigation. Directors may have a conflict where, for example, they: (1) are employed by a venture fund receiving a special, cognizable benefit not shared with common stockholders (such as through a liquidation preference), (2) are a member of management who is getting a special benefit or who is viewed as answering to a venture fund, or (3) have a close personal or business relationship to a person with such an interest or conflict.14 The entire fairness standard of review stands in stark contrast to the deferential business judgment rule. Under the entire fairness standard, a court closely scrutinizes the fairness of price and the terms of a transaction, as well as the decision-making process associated with the transaction—a fact-intensive inquiry that makes dismissal difficult and typically results in protracted litigation. The underlying question is whether fiduciaries have breached their duty of loyalty, such that they should be liable for monetary damages, the transaction should be rescinded, or some other remedy should be available.

For dual fiduciaries, this doctrine can create a significant challenge. These directors represent the economic interests of the funds that appointed them, and those funds have limited partners to look out for. Yet, when acting as directors, they must serve as impartial stewards of the corporation and its residual claimants. Delaware law confirms that fund obligations do not displace or dilute corporate fiduciary duties.

B.    The Valuation Gap

Private company valuation presents further complexities not found in the public markets. Unlike public corporations, venture-backed companies lack an observable daily trading price. Their value is often determined by reference to the price paid in the most recent financing round. Because that price reflects a negotiated bundle of contractual rights attached to preferred stock, valuation cannot be separated from capital structure.

Given that reality, the price paid in the most recent financing round does not necessarily correspond to the economic value of the common equity once liquidation preferences and other rights are accounted for.15 Convertible preferred stock—particularly its liquidation preference—shapes the analysis. A baseline 1x non-participating preference entitles the investor to recover its investment before any distribution to the common. Multiple or participating preferences increase that priority. These rights mean that identical enterprise values can produce markedly different outcomes under the preference waterfall. For example, two companies could be sold for the same price but produce different outcomes for common stockholders depending on how much preferred stock is outstanding, the price at which it was sold, and the extent of its liquidation preference (e.g., a 1X or 2X liquidation preference).

That distinction plays an important role in a proper fiduciary inquiry. A sale price that appears consistent with the financing round could leave the common with nothing after preferences are applied. By contrast, a transaction below a prior reported valuation can still generate value for the residual claimants if preferences are exceeded.16

This all matters because the rights of preferred stockholders are contractual and not the focus of fiduciary duties under the case law.17 Directors may not treat financing valuations or liquidation preference waterfalls as dispositive without examining how the capital structure operates in the specific transaction before them. If conflicted directors allow contractual priorities to drive outcomes—rather than evaluating the corporation’s and stockholders’ interests as a whole—they could face judicial scrutiny.18

II.   M&A Inflection Points

The sale of a venture-backed company can put the disparate rights embedded in its capital stack under strain. As discussed in Part I, a mature startup’s capitalization often reflects multiple financing rounds, each introducing liquidation preferences and contractual rights. When a liquidity event fails to generate proceeds sufficient to satisfy all claims, the board must determine how value will be distributed among competing constituencies. Fiduciary obligations must guide that allocation.

A.   Changes of Control

Under bedrock Delaware law, directors’ duties of care and loyalty to the corporation and its stockholders are unremitting.19 Those duties are typically measured with a view towards long-term growth.20 But the horizon changes when a board undertakes a transaction that will result in a sale for cash or change of control. Directors enter what Delaware jurisprudence describes as “Revlon mode,” in which the directors’ obligation is to seek the transaction that maximizes the value reasonably available for the corporation’s stockholders.21 This mandate does not alter the identity of the beneficiary of the board’s fiduciary duties. Rather, it focuses on the goal of immediate value maximization because the transaction will end stockholders’ ongoing equity participation.

In the venture-backed context, however, value maximization is complicated by capital structure. Preferred stockholders may be contractually entitled to receive the first dollars of any sale through liquidation preferences.22 Because of this priority, a transaction that fully satisfies those preferences may leave common stockholders with little or nothing.23

This disparity creates a dilemma for dual fiduciaries. VC-affiliated directors could agree to a sale price that returns capital to their funds, even if common stockholders would prefer to continue operations in pursuit of a higher valuation. Their fiduciary duties as directors, however, run to the corporation and its residual claimants—not to the funds that appointed them. The contract rights of preferred stockholders dictate payment priority, but they do not insulate directors from equitable review if the board pursues a sale to trigger the waterfall at the enterprise’s expense. That is, the underlying decision to sell the company is the fiduciary act, and different economic interests can create conflicts of interest. In particular, when a majority of the board is affiliated with preferred holders who uniquely benefit from the transaction—or otherwise has a special interest such as where management board members receive bonuses or has a close relationship to parties receiving differential benefits—the decision will trigger entire fairness review, unless a company uses cleansing process mechanisms.24

B.    Common Stock as the Focal Point in Prior Litigations

The tension between contractual rights and fiduciary obligation was squarely addressed in In re Trados Inc. Shareholder Litigation.25 In Trados, the board of a venture-backed software company approved a sale for $60 million. The proceeds were absorbed by a management incentive plan and the liquidation preferences of preferred stockholders, leaving no consideration for common stockholders.26 The board was dominated by directors affiliated with venture funds that held preferred stock. The Court of Chancery concluded that these directors were interested in the transaction because their funds received disparate consideration and subjected the merger to onerous entire fairness review.27

The court’s analysis drew a distinction between preferred stockholders, who are protected by contract, and common stockholders, who are protected by fiduciary duty.28 Directors may honor the contractual rights of preferred holders, but when those rights diverge from the interests of the common, fiduciary duties require directors prioritize common stockholders’ interests. As the Trados court explained, directors of a solvent corporation must strive in good faith and on an informed basis to maximize the value of the corporation for its residual claimants—not for its contractual claimants.29

After trial, the court held that the merger satisfied entire fairness review because the common stock was economically valueless at the time of the merger.30 Even though zero was a fair price under the circumstances, the path to that conclusion, involving years of litigation, was arduous. The court sharply criticized the board’s “flawed process” and observed that the directors failed to appreciate that their fiduciary mandate ran to common stockholders.31

Trados stands for two key propositions. First, preferred rights do not redefine fiduciary duty; they operate within it. Second, a “fair price” finding after trial can be something of a hollow victory. It requires years of litigation, invasive discovery, and the uncertainty of trial. The safer course, where possible, is not to gamble on ex post vindication. Directors can instead construct a process that considers the interests of common stockholders from the start and avoids expensive and protracted litigation.

C.    The Lessons of Nine Systems

If Trados demonstrates that fair price can, in some circumstances, satisfy entire fairness despite a flawed process, In re Nine Systems Corp. Shareholders Litigation underscores that process failures can themselves carry consequences—even where the economic outcome is defensible.32

In Nine Systems, the board approved a financing and related recapitalization that diluted common stockholders but stabilized the company.33 When the company later sold, common stockholders challenged the prior financing and recapitalization. As in Trados, the court applied entire fairness review because the VC-affiliated directors were conflicted “dual fiduciaries.”34 The court concluded that the common stock lacked value at the time of the transaction, suggesting that the price component of entire fairness was satisfied.35

Yet the court did not treat that conclusion as dispositive. It found that the directors’ process was grossly deficient. The VC affiliates excluded the independent director from meaningful participation, relied on informal and inadequate valuation “guesstimates,” and failed to ensure proper disclosure of material conflicts.36 Though the recapitalization may have been economically inevitable, it was accomplished in a way that fell short of fiduciary standards, according to the court.37

Consequently, the court exercised its equitable powers to award attorneys’ fees based on findings of bad faith process failures.38 In doing so, it reinforced that a good process is not a procedural technicality. It is the mechanism through which courts assess whether directors understood and fulfilled their fiduciary obligations. Even where the price might be fair, a process infected by exclusion, opacity, or indifference to conflict can expose boards to consequences.

Trados and Nine Systems are leading examples of the structural conflicts that can arise in the venture-backed company context and how litigation over them can play out, but other cases have echoed similar principles and approaches.39

We would also note that as the structure of M&A events morphs in the market—for example, to take the form of an acqui-hire involving negotiation with the company—directors will want to take the above principles into account. 

D.    Procedural Shields

Delaware law does not prohibit conflicted transactions, and conflicts are not themselves wrongful.40 But the jurisprudence from Trados to Nine Systems offers more than cautionary tales and evidences the complicated litigation that can ensue. It, together with the Delaware corporate statute, also provides guidance as to how conflicts can be identified and managed through procedural protections.

One powerful tool available to venture-backed boards is a special committee of disinterested directors, where such an approach is available.41 A properly formed and functioning special committee can potentially “cleanse” a conflict and provide safe harbor protection, which frequently provides a basis for dismissal of the suit.42

Recent amendments to the Delaware General Corporation Law establish a framework designed to address conflicted transactions. The new law, the constitutionality of which was upheld by the Delaware Supreme Court,43 provides that where certain procedural rules are followed, a transaction may qualify for a statutory safe harbor.44

The statute outlines specific criteria for the use of a board committee. For example, the committee must consist of at least two members45—a departure from existing common law, which has occasionally permitted a one-person committee. The statute further requires that the board must determine that each committee member is disinterested (i.e., is not receiving material benefits in the transactions and does not have a material relationship to those receiving such benefits). The committee must be aware of all material information concerning applicable conflicts of interest, and the committee must act in good faith and without gross negligence.46 Boards and their advisors should carefully delineate the powers and mandate of the committee. This includes taking into account whether a controlling stockholder conflict exists, in which case the committee must have the authority to negotiate, or oversee the negotiation of, the transaction and reject the transaction.47

Another equally powerful tool for cleansing conflicts is the receipt of a disinterested stockholder vote. Under the Delaware statute, such a vote can potentially also provide safe harbor protection and result in the dismissal of fiduciary duty litigation. To qualify, the transaction must be approved by disinterested stockholders—again defined as those lacking a material interest in a transaction or material relationship to parties who have such an interest—on an informed and uncoerced basis.48

One important consideration in structuring these mechanisms is whether the company has a controlling stockholder that is receiving a special benefit in the sale of the company. The legislation provides parameters for identifying a controlling stockholder. These include assessing whether a stockholder either (1) has a majority of the outstanding stockholder voting power or can elect a majority of the board, or (2) has power functionally equivalent to that of a majority stockholder, possesses 1/3 or more of the outstanding stockholder voting power, and has the power to exercise managerial authority.49 The statute also recognizes the concept of a control group among stockholders.50

If there is a controlling stockholder receiving a material benefit in the transaction and the shares of the disinterested stockholders will be sold, cancelled, or converted, the statute requires the use of both a committee process and a disinterested stockholder vote to qualify for the safe harbor. In the context of a controlling stockholder transaction, a disinterested stockholder vote must also be a term of the transaction.51

For various private companies, these processes may not be available as a practical matter. A company might lack disinterested directors available to serve, complexities in calculating the disinterested stockholder vote could arise, or a company may choose not to incur the execution risk of the vote. In such cases, however, a board can still strive to construct the most responsible process available and may secure benefits in doing so. We discuss such process considerations at the end of this article.

III. New Frontiers: Direct Listings, de-SPACs, and the Public Markets

Although M&A is the liquidity event that has prompted much of the recent stockholder litigation in the private company space, other liquidity events—such as public market entries—can introduce their own distinct governance considerations.

The transition from a private venture-backed startup to a public reporting company materially changes the fiduciary landscape. Though the traditional initial public offering (IPO) remains the most familiar path to public markets, alternative routes have emerged. These modern approaches, including the direct listing and the de-SPAC merger, each present distinct considerations. As companies stay private longer and their stockholder bases expand, the decision to go public can reflect liquidity pressures as much as capital needs.52 For boards, overseeing this transition requires attention to the fiduciary implications of monetizing illiquid equity.

A.    From Private Complexity to Public Standardization

Late-stage private companies often operate under governance arrangements that are the products of years of negotiated financing rounds. Their capital structures typically include multiple series of preferred stock, investor-specific protective provisions, voting agreements, and other bespoke rights calibrated to allocate control and risk among founders and investors.53 This private ordering permits flexibility, but it also produces a layered and highly differentiated capital stack.

A public market entry alters that structure in several important ways. When a company goes public, multiple series of preferred stock often convert into common stock. Negotiated investor rights also fall away, replaced by a standard set of federal securities laws and exchange rules alongside state corporate law. A company may also go public with a dual-class framework or other customized governance arrangements, but the negotiated features of the private company existence will be replaced. This structural transition can be compounded by pent-up liquidity demands, although in recent years more liquidity opportunities have flowed to private companies while they are private.54

B.    Direct Listings

To address the desire for liquidity without the dilution associated with a traditional IPO, and to permit a different approach to selling and pricing, some late-stage companies have turned to the direct listing. Unlike an IPO, where the company issues new shares to raise capital, a direct listing is a secondary offering in which existing stockholders sell their shares directly to the public on a stock exchange. The structure allows existing stockholders—founders, employees, and investors—to access the public market at listing and for price discovery to be conducted differently than in the traditional underwritten IPO setting.55  Respected organizations have cited the benefits of direct listings.56

This structure, like others, involves fiduciary considerations. By definition, a direct listing requires corporate insiders to sell large quantities of stock to the public at the earliest possible opportunity to create a market. If the company’s stock price subsequently declines, these sales can be recast by stockholder plaintiffs as “insider trading” or “dumping” shares in breach of the fiduciary duty of loyalty under the Brophy doctrine.57 The very mechanism designed to solve the liquidity problem creates a dynamic by which fiduciaries can be accused of impropriety.

The Delaware Court of Chancery addressed this conundrum in Central Laborers’ Pension Fund v. Karp, a derivative action challenging the $2 billion in stock sales made by insiders following a company’s 2020 direct listing.58 The plaintiffs alleged that the directors, purportedly knowing that the company’s growth was slowing, orchestrated the direct listing to offload shares at artificially inflated prices.59

In dismissing the claims, the court endorsed the direct listing as a legitimate tool for liquidity, rejecting the theory that insider selling in this context is “intrinsically suspect.”60 The court reasoned that because the “whole point” of a direct listing is to provide liquidity for long-held private stakes, the fact of selling—even in large volumes—cannot, without more, support an inference of bad faith. As the court noted, the company had been private for seventeen years, and the direct listing was the first opportunity for its stockholders to realize the value of their equity.61 The court concluded that it would be “inequitable” to penalize directors for utilizing the very mechanism designed for that purpose simply because the trades were lucrative.62 The court took note that 75% of the challenged sales (by total proceeds) were executed under Rule 10b5‑1 trading plans or as automatic tax withholding protocols.63 Because these mechanisms removed the insiders’ discretion over the timing of trades, they offered a “safe harbor” that negated any inference of market timing.64

Direct listings do not provide an absolute shield against well-pled allegations of actual insider trading.65 They cannot, of course, immunize fiduciaries from liability if the directors traded while in possession of material non-public information. Still, case law confirms that the structure itself is not suspect and provides guidance on methods for mitigating litigation risk.

C.    De-SPAC Mergers and Fiduciary Risk

A de-SPAC transaction allows a private target to merge with a publicly traded special purpose acquisition company (SPAC). Through the business combination with a SPAC, the target can—as with a direct listing—access the public markets without navigating a traditional IPO.66

In the de-SPAC context, the most acute fiduciary and governance risks often exist on the SPAC side of the ledger. As several Delaware cases have addressed, a de-SPAC merger can involve inherent misalignments between the SPAC’s insiders and its public stockholders.67 SPAC sponsors typically hold “founder shares”—the so-called “promote”—that convert into a significant equity stake in the post-merger entity for nominal consideration.68 This promote only yields value if a business combination is consummated within a defined window, typically 18 to 24 months. If the SPAC liquidates, the sponsor’s investment is wiped out.

This dynamic introduces a divergence of interests. The sponsor, and investors holding founder shares, are economically incentivized to close any deal—even a value-destructive one.69 Public stockholders, by contrast, would prefer a liquidation to a bad deal because they would receive back their investment with interest. The SPAC’s directors are caught in the middle.

Delaware courts have responded to these structural realities by applying rigorous equitable scrutiny. In In re MultiPlan Corp. Stockholders Litigation, the Court of Chancery held that a SPAC sponsor could be deemed a “controlling stockholder” given its unique and complete influence over the entity. Because the sponsor allegedly extracted a unique benefit to the detriment of the public stockholders, the transaction was subjected to entire fairness review.70 The court also recognized that the SPAC structure relies on a fundamental public stockholder protection: the right to redeem shares for cash prior to the merger.71 When fiduciaries impair that right by depriving public stockholders of material information needed to make a redemption choice, they breach their duty of loyalty.72

The juxtaposition of the direct listing in Karp with the de-SPAC merger in MultiPlan is instructive. In Karp, the court dismissed claims because the challenged sales were transparent, market-driven, and insulated by procedural guardrails like 10b5-1 plans.73 The transaction in MultiPlan was burdened by a flawed governance structure and failure to look out for the interests of public stockholders.74

For the private operating company undertaking a de-SPAC merger, the governance considerations are real but may be less sharp. In general, a private company board should consider the best available path for taking the company public and positioning the company for long-term success, including from the vantage point of the common stockholders.

IV.  Fiduciary Duties in Distress and Failure

For a venture-backed startup, failure is a more frequent outcome than a successful public exit. The “power law” of returns assumes that a small number of portfolio companies generate extraordinary gains while the majority fail to return capital to all equity holders.75 For these companies, the end is not an IPO but a distressed sale, a quiet wind-down, or an informal liquidation.

Navigating a company’s demise presents a distinct set of fiduciary challenges that magnify the risks explored earlier in this article. Delaware law does not create new fiduciary duties for directors of venture-backed companies in decline. But it alters who may enforce these duties, as discussed next. 

Separately, the venture ecosystem has developed a parallel system of “soft landings” that often substitutes for formal bankruptcy.76 These mechanisms may be efficient, but they are not risk-free. Clarity on the board’s fiduciary duties and a strong process remain as important as ever.

A.    Insolvency and the Residual Claimant Framework

Under Delaware law, directors of a solvent corporation owe fiduciary duties to the corporation for the benefit of its stockholders.77 Insolvency does not create a new class of duties running directly to creditors. Rather, it alters who stands in the shoes of the corporation to enforce those duties.

The Delaware Supreme Court clarified this principle in North American Catholic Educational Programming Foundation, Inc. v. Gheewalla.78 It held that creditors of an insolvent corporation may assert derivative claims on behalf of the corporation. As the court explained, when a corporation becomes insolvent, creditors become the principal residual beneficiaries of any increase in value.79 Because the corporation’s insolvency makes the creditors the principal constituency injured by fiduciary breaches that diminish the firm’s value, equitable considerations grant them derivative standing to sue on the corporation’s behalf.80 Still, those creditors cannot assert direct claims for breach of fiduciary duty against directors and officers.81

This distinction frames how boards should view the approach to insolvency. Before Gheewalla, practitioners and commentators debated whether entering the so-called “zone of insolvency” created a mandate to favor creditors over stockholders.82 The Delaware Supreme Court rejected that formulation. It explained that “[w]hen a solvent corporation is navigating in the zone of insolvency, the focus for Delaware directors does not change: directors must continue to discharge their fiduciary duties to the corporation and its shareholders by exercising their business judgment in the best interests of the corporation for the benefit of its shareholder owners.”83

The practical consequence of insolvency is therefore not a change in the directors’ standard of conduct, but an expansion of the range of potential plaintiffs with standing to challenge board decisions. On the one hand, directors who take extreme risks to salvage underwater equity may face creditor derivative suits alleging that they improperly gambled with corporate assets (albeit with the understanding that such decisions should be subject to the business judgment rule if directors act with care and without a disabling conflict of interest). On the other hand, directors who prematurely liquidate or pursue transactions that disproportionately benefit senior creditors or preferred stockholders may face claims from common stockholders.

B.    The Venture Model and Failure

Although failure is common in venture finance, formal bankruptcy is not. Venture-backed startups rarely enter Chapter 11 proceedings unless significant third-party debt exists, the company has adequate resources to undertake a Chapter 11 proceeding, and the business is sufficiently complex. That reality reflects both asset composition and capital structure.

Unlike typical industrial firms, startups often lack hard assets capable of generating liquidation value. Their principal assets—intellectual property, proprietary code, customer relationships, and human capital—are perishable. A prolonged Chapter 11 process can therefore erode enterprise value rather than preserve it.84

The capital structure of venture-backed companies often further reduces the practical utility of bankruptcy. These firms may have limited secured debt, modest trade obligations, and large amounts of preferred equity. As discussed, however, preferred stockholders are equity holders—not creditors—and their liquidation preferences arise from contract rather than debt instruments.85 Fiduciary duties do not expand or recharacterize preferred stockholders’ contract rights.86

For these structural reasons, venture-backed companies may choose to pursue alternatives designed to preserve residual value and minimize public stigma. These alternatives include:

 Acqui-hires: These are transactions where a buyer acquires the company primarily to secure its talent rather than its products or services.87 This allows employees to find new jobs and the company to wind down operations without the stigma of a total collapse.

 Assignments for the Benefit of Creditors (ABCs): An ABC is a state-law alternative to bankruptcy.88 In Delaware, “ABCs are governed by statute and involve judicial oversight” and often “proceed ex parte.”89 The company assigns its assets to a third-party assignee who liquidates them for the benefit of creditors.

 Distressed M&A: In this scenario, selling the company for a nominal amount or an earnout provides for the optics of an exit, even if the proceeds are insufficient to clear the liquidation preferences of preferred stock. In evaluating these exits, boards must strategically assess the executability of carving out distinct business lines versus selling the entire enterprise. Distress may be preceded by attempts at “rescue financing.” If the M&A transaction takes the form of a take-private by a founder or large stockholder, the board faces conflicts of interest. Directors must balance the need for procedural protections against the commercial reality that the time required to perfect them could destroy the deal’s executability given the company’s shrinking cash reserves.

 Managed Wind-down: A company may choose a managed wind-down or dissolution. This approach could also include a Chapter 7 proceeding. In Delaware, to undertake a state law-based dissolution, directors must comply with the statutory scheme designed to protect claimants. The statute reflects the legislature’s efforts to balance efficient wind-downs with creditor protections. Directors who fail to adhere to the statutory requirements forfeit their “safe harbor” protections and remain exposed to post-dissolution liability for long-tail claims.90

These mechanisms are generally faster, cheaper, and less public than bankruptcy. They allow talent and capital to be redeployed efficiently. But they also lack certain oversight features of a Chapter 11 proceeding. There is no automatic stay, no creditor committee, and relatively limited (or no) judicial supervision of asset sales. Absent those measures, fiduciary obligations play a central role in constraining opportunism and structuring the board’s decision-making. Robust board deliberation, appropriate oversight of conflicts, and documentation of the value-maximizing rationale for a distressed exit are the means by which directors discharge their duties in this phase of the corporate lifecycle.

C.    Conflicts in Collapse

Financial distress has a way of clarifying where stockholders’ interests diverge, as evidenced by Delaware cases in which common stockholders challenged transactions undertaken by underperforming companies that resulted in differential treatment for preferred stockholders.91 Venture capitalists operate under a model that relies on a small number of massive successes. They face steep opportunity costs when dedicating time and resources to a struggling company.92 Against this reality, VC-affiliated directors may choose to shut down a company that has a questionable future or has not performed well and liquidate its assets.93 Doing so can allow them to recover whatever portion of their liquidation preferences remains, while freeing partners to focus on more promising ventures.94 Such action can also have the benefit of protecting the VC firm’s reputation and limiting further capital calls.

Conversely, founders and common stockholders—whose equity is underwater—face asymmetrical payoffs. Because they hold the residual claim and have nothing left to lose in a liquidation, they may be economically incentivized to escalate risk. They may prefer a dramatic pivot or a bridge loan rather than a quick shutdown.  They may also prefer a sale of the company early in its life.95

When a board is dominated by preferred-affiliated directors, the decision to pursue a rapid dissolution, an ABC, or a distressed sale raises fiduciary concerns.96 Delaware law does not prohibit transactions that wipe out common stockholders.97 Indeed, if a company is truly failing, an “efficient liquidation” might be the value-enhancing choice for the enterprise.98 Regardless, Delaware law demands that the decision be made loyally, in good faith, and through a process that considers the interests of the corporation as a whole.

This setting presents several recurring risks.

First, preference-driven decision-making is fraught. Satisfying liquidation preferences does not end the fiduciary inquiry. If the corporation itself would be better served by pursuing an alternative that offers potential upside, and potential conflicts of interest underlie the board’s decision, courts may scrutinize a board’s haste.

Second, looming failure creates a temptation of process abandonment. To find a solution quickly, boards might skip over governance best practices. Excluding independent directors, failing to document deliberations, or ignoring common stockholders or creditors may backfire in litigation.

Third, self-interested motives can come to the fore. VC-affiliated directors may face, or at least appear to face, subtle incentives to minimize reputational damage, avoid additional capital commitments, or redeploy time to more promising portfolio companies. These incentives are not unlawful, but they cannot drive corporate decision-making at the expense of the enterprise; instead, directors should understand potential misalignment that may exist or appear to exist and construct an appropriately responsible decision-making process.

V.   A Modern Governance Playbook for Directors

The application of fiduciary duties in the private company context is highly contextual and shifts with the mechanics and terms of a chosen liquidity event. As venture capital continues to fuel the innovation economy, the legal demands placed on private company boards will only intensify. For those directors, good process is essential. Whether navigating a sale, going public, or a distressed wind-down, VC-affiliated directors should remain aware of their dual-fiduciary status and the conflicts created by liquidation preferences.99 Several steps should feature in the directors’ modern governance playbook.

As a basic requirement, director independence and disinterestedness should be reviewed case-by-case and director-by-director. Boards must make this assessment for each specific transaction. In doing so, they should be mindful that social and professional ties, at least when they reach a certain level of materiality, can undermine a finding of disinterestedness.100

Depending on the scale of the conflicts, directors and their counsel should consider the use of certain high-impact procedural protections. The deployment of a special committee, or of a disinterested stockholder vote, can serve as a powerful tool in sterilizing conflicts. In potentially conflicted transactions, forming an appropriately empowered committee of disinterested directors can improve outcomes not only in negotiations but also in litigation risk. A properly formed committee provides robust procedural protection and significantly mitigates litigation risk. Likewise, the statute recognizes that a fully informed, uncoerced vote of disinterested stockholders may provide a pathway to safe harbor protection. For some transactions, where a controlling stockholder conflict exists and disinterested stockholders’ shares are being cancelled or acquired, a company could need both a committee process and a disinterested stockholder vote to secure a safe harbor.

But even if a board cannot employ a special committee or a disinterested stockholder vote, it should implement process steps to reflect that it has fulfilled its fiduciary duties. Doing so may mitigate litigation risk and, if a lawsuit arises, leave directors better positioned to demonstrate the fairness of their actions.

First, board members must understand their fiduciary duties and which constituencies get the benefit of those fiduciary duties. That understanding should be clearly reflected in the board minutes and records. Some prior case law has emphasized the risks where boards did not satisfy this step.101

Furthermore, the board should seriously consider and document valuation and the exploration of viable alternatives. Relying on casual or ballpark figures is inadvisable and has been criticized in prior cases.102 Fairness opinions, while not dispositive, can be an important tool where a company has the resources for one and a transaction is suitable for such an opinion.103 Such opinions can demonstrate that directors acted on an informed basis and engaged with the economic realities of the company’s capital structure. Where a fairness opinion is not possible or practicable, a board is well-advised to document that reality. Delaware courts have recognized that fairness opinions are not mandatory and will evaluate the board’s information-gathering contextually.104

Boards should also negotiate in the best interests of common stockholders. This flows from the principles noted above that Delaware law focuses on common stockholders as compared to preferred stockholders, at least where preferred stock terms address the matter in question. 

Accompanying these steps, excellent documentation of the board’s process is essential. Board and committee minutes are critical evidence in governance litigation and should give a thorough record of the information reviewed, alternatives considered, and the rationale for the final decision to demonstrate that the board understood and fulfilled its duties. If, for example, a transaction involves a management incentive or “carve-out” plan or other feature that redirects proceeds away from the residual claimants, the board should carefully negotiate and document its rationale.105

Related to that last point, boards should closely scrutinize management incentive or carve-out plans—including the need for them and their size and scope—and explain how they advance value for stockholders, especially common stockholders.

Finally, boards must ensure proper candor when communicating with stockholders. When seeking stockholder approval or apprising stockholders of appraisal rights in the merger context, the board must disclose all material information relevant to the decision. Directors should also carefully consider the content of notices informing stockholders that action was taken by written consent. Utilizing procedural devices like a stockholder vote will fail to cleanse a transaction—and may invite further liability—if the board hides the ball or relies on misleading partial disclosures.

Conclusion

The ability to articulate a clear, informed, and diligent process is not just a matter of best practices, but a critical legal safeguard for directors operating in the high-stakes world of private company liquidity events. Fiduciary duties must be exercised with nuance and foresight, carefully adapted to the company’s lifecycle, its complex capital structure, and its chosen exit path. Ultimately, the goal of these procedural safeguards is not merely to mitigate litigation risk, but to ensure that the pathways to liquidity remain open, predictable, and capable of fueling the next wave of innovation.ling the next wave of innovation.

• See, e.g., Robert P. Bartlett, III, A Founder’s Guide to Unicorn Creation: How Liquidation Preferences in M&A Transactions Affect Start-up Valuation, in Research Handbook on Mergers and Acquisitions 123 (Claire A. Hill & Steven Davidoff Solomon eds., 2016); see also Elizabeth Pollman, Startup Governance, 168 U. Pa. L. Rev. 155, 160–62 (2019).
• See Robert Bartlett, Standardization and Innovation in Venture Capital Contracting: Evidence from Startup Company Charters, 55 J. Legal Stud. 83 (finding empirically that the capital structures of startups have become substantially more complex over the past two decades, with a dramatic rise in the issuance of multiple series of preferred stock).
• See, e.g., McRitchie v. Zuckerberg, 315 A.3d 518 (Del. Ch. 2024); eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 34 (Del. Ch. 2010); Paramount Commc’ns Inc. v. Time Inc., 571 A.2d 1140, 1154–55 (Del. 1989).
• See Ronald J. Gilson, Engineering a Venture Capital Market: Lessons from the American Experience, 55 Stan. L. Rev. 1067 (2003).
• In re Trados Inc. S’holder Litig., 73 A.3d 17, 38–40 (Del. Ch. 2013).
• See Jesse M. Fried & Mira Ganor, Agency Costs of Venture Capitalist Control in Startups, 81 N.Y.U. L. Rev. 967, 987–90 (2006).
• See Pollman, supra note1, at 188–89 (describing horizontal conflicts between preferred and common shareholders).
• See Ronald J. Gilson, Engineering a Venture Capital Market: Lessons from the American Experience, 55 Stan. L. Rev. 1067, 1088–92 (2003); Jesse M. Fried & Mira Ganor, Agency Costs of Venture Capitalist Control in Startups, 81 N.Y.U. L. Rev. 967, 974–83 (2006).
• See Elliott Assocs., L.P. v. Avatex Corp., 715 A.2d 843, 852–53 (Del. 1998) (explaining that the rights of preferred stockholders are “contractual in nature” and that the court’s role in enforcing them is “essentially one of contract interpretation”).
• Trados, 73 A.3d at 40–41.
• Id.; see also Wei v. Levinson, 2025 Del. Ch. LEXIS 132 (Del. Ch. June 3, 2025); Equity-Linked Investors, L.P. v. Adams, 705 A.2d 1040 (Del. Ch. 1997).
• See Jedwab v. MGM Grand Hotels, Inc., 509 A.2d 584, 593–94 (Del. Ch. 1986) (holding that preferred stock rights are contractual in nature and defined by certificate of incorporation); SV Inv. Partners, LLC v. ThoughtWorks, Inc., 7 A.3d 973, 983–84 (Del. 2011) (enforcing preferred stock contractual rights according to charter terms).
• Brevan Howard Credit Catalyst Master Fund Ltd. v. Spanish Broadcasting Sys., Inc., 2014 WL 2960359 (Del. Ch. June 27, 2014).
• See, e.g., Trados, 73 A.3d at 54; Calesa Assocs., L.P. v. Am. Capital, Ltd., 2016 Del. Ch. LEXIS 41 (Del. Ch. Feb. 29, 2016); Carsanaro v. Bloodhound Techs., Inc., 65 A.3d 618 (Del. Ch. 2013).
• See Ronald J. Gilson & David M. Schizer, Understanding Venture Capital Structure: A Tax Explanation for Convertible Preferred Stock, 116 Harv. L. Rev. 874, 881–90 (2003) (explaining economic function of convertible preferred and divergence between headline valuation and allocation of downside risk); William W. Bratton & Michael L. Wachter, A Theory of Preferred Stock, 161 U. Pa. L. Rev. 1815, 1821–30 (2013) (describing preferred stock as a hybrid instrument allocating control and risk through contract); Will Gornall & Ilya A. Strebulaev, Squaring Venture Capital Valuations with Reality, 135 J. Fin. Econ. 120 (2020). 

  .

• See infra Section II (discussing that Delaware law requires directors to evaluate the transaction from the perspective of the corporation and its residual claimants).
• See Equity-Linked Invs., L.P. v. Adams, 705 A.2d 1040, 1042–43 (Del. Ch. 1997) (directors owe fiduciary duties to common when exercising discretionary authority affecting preferred rights).
• E.g., Trados, 73 A.3d at 44–58.
• See Malone v. Brincat, 722 A.2d 5, 10 (Del. 1998).
• See Paramount Commc’ns Inc. v. Time Inc., 571 A.2d 1140, 1150–54 (Del. 1989) (explaining that directors may consider long-term strategy absent a change of control).
• TW Services, Inc. v. SWT Acquisition Corp., 1989 WL 20290, at *8 (Del. Ch. Mar. 2, 1989); see also Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182 (Del. 1986); Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34, 42–44 (Del. 1994) (“The consequences of a sale of control impose special obligations on the directors of a corporation. In particular, they have the obligation of acting reasonably to seek the transaction offering the best value reasonably available to the stockholders.”).
• See, e.g., Rothschild Int’l Corp. v. Liggett Gp., Inc., 474 A.2d 133, 136 (Del. 1984) (“[P]referential rights are contractual in nature and therefore are governed by the express provisions of a company’s certificate of incorporation.”).
• See Robert P. Bartlett, III, Shareholder Wealth Maximization as Means to an End, 38 Seattle U. L. Rev. 255, 256 (2015) (discussing the tension between maximizing firm value and maximizing returns to common stockholders).
• See Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983).
• 73 A.3d 17 (Del. Ch. 2013).
• Id. at 20–21 (noting that the MIP took the first $7.8 million, preferred stockholders received the remaining $52.2 million, and common stockholders received nothing).
• Id. at 44.
• Id. at 39–40.
• Id. at 40–41 (“[T]he standard of conduct for directors requires that they strive in good faith and on an informed basis to maximize the value of the corporation for the benefit of its residual claimants, the ultimate beneficiaries of the firm’s value, not for the benefit of its contractual claimants.”).
• Id. at 76.
• Id. at 62 (noting that the defendants “did not understand that their job was to maximize the value of the corporation for the benefit of the common stockholders, and they refused to recognize the conflicts they faced”).
• In re Nine Sys. Corp. S’holders Litig., 2014 WL 4383127, at *46 (Del. Ch. Sept. 4, 2014).
• Id. at *1–2.
• Id. at *33–34.
• Id. at *46.
• Id. at *35 (discussing the exclusion of the independent director); id. at *2, *36 (noting the valuation was based on “handwritten guesstimates” and a “back of the envelope” calculation by a conflicted director, leaving the board inadequately informed); id. at *37 (finding the failure to disclose the participants and terms of the recapitalization to the non-participating stockholders was “materially misleading” and “powerful evidence of unfair dealing”).
• Id. at *47 (explaining that “a grossly unfair process can render an otherwise fair price, even when a company’s common stock has no value, not entirely fair”).
• Id. at *52 (authorizing fee-shifting because the transaction was not entirely fair due to the defendants’ “grossly inadequate process”); see In re Nine Sys. Corp. S’holders Litig., 2015 WL 2265669, at *4 (Del. Ch. May 7, 2015) (awarding $2 million in attorneys’ fees).
• See, e.g., Carsanaro, 65 A.3d at 618; Wei v. Levinson, 2025 Del. Ch. LEXIS 132; Calesa Assocs., L.P. v. Am. Capital, Ltd., 2016 Del. Ch. LEXIS 41; New Enter. Assocs. v. Rich, 292 A.3d 112 (Del. Ch. 2023).
• See In re Goldman Sachs Gp., Inc. S’holder Litig., 2011 WL 4826104, at *20 (Del. Ch. Oct. 12, 2011) (“A conflict of interest may involve wrongdoing, but is not wrongdoing itself.”); Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983) (explaining that conflicted transactions are not per se invalid).
• See Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1117–18 (Del. 1994).
• See id. at 1117 (burden shift); Kahn v. M&F Worldwide, 88 A.3d 635, 644–45 (Del. 2014) (business judgment restoration where dual protections used).
• See Rutledge v. Clearway Energy Grp. LLC, 2026 WL 548504 (Del. Feb. 27, 2026). 
• See Del. Code Ann. tit. 8, § 144(a)–(c) (2025).
• See id. § 144(a)(1), (b)(1).
• See id.
• See id. § 144(b)(1).
• See id. § 144(a)(2), (b)(2); see also id. § 144(e)(5) (defining “disinterested stockholder”).
• See id. § 144(e)(2) (defining “controlling stockholder”).
• See id. § 144(e)(1) (defining “control group”).
• See id. § 144(c)(1) (requiring compliance with both the independent committee and disinterested stockholder vote provisions for a “going private transaction”); see also id. § 144(e)(6) (defining a “going private transaction” as one where all or substantially all of the shares held by disinterested stockholders are cancelled, converted, or acquired).
• See Pollman, supra note 1, at 211 (describing the governance complexity and liquidity pressure in late-stage startups).
• See Bartlett, supra note 2, at 33–35 (demonstrating empirically that the “conventional, simple Series A capital structure” consisting of a single class of common and preferred stock dropped from 86% of sample charters in 2004 to just 5% in 2022, reflecting the modern reality of highly complex, multi-series capital stacks).
• See, e.g., Morgan Stanley: At Work, As Companies Stay Private Longer, How Will IPOs and Employee Liquidity be Impacted?, https://perma.cc/RGG8-HRTH (last visited Mar. 30, 2026); Robert Frank, Startups are Staying Private Longer Thanks to Alternative Capital, CNBC: Inside Wealth (Oct. 7, 2025), https://perma.cc/82FX-3PMD.
• See Slack Techs., LLC v. Pirani, 598 U.S. 759, 763–64 (2023) (describing the direct listing process and observing that liquidity access rather than capital raising is a motivating factor for some firms that seek to become public); Cent. Laborers’ Pension Fund v. Karp, 349 A.3d 1165 (Del. Ch. 2025)(noting that in a direct listing, “a company does not issue new shares but offers preexisting shares for sale” to afford shareholders “the convenience of being able to sell their existing shares on a public exchange”).
• See, e.g., Direct Listings, NASDAQ, https://perma.cc/H2AK-49P4; Direct Listings, N.Y. Stock Exch., https://perma.cc/7GX2-RMTE.
• See Brophy v. Cities Serv. Co., 70 A.2d 5, 8 (Del. Ch. 1949) (establishing the cause of action for insider trading as a breach of loyalty); see also Guttman v. Huang, 823 A.2d 492, 502 (Del. Ch. 2003) (clarifying that market sales by directors “are not quite as suspect as a self-dealing transaction in which the buyer and seller can be viewed as sitting at both sides of the negotiating table”).
• Karp, 2025 WL 1213104 (Del. Ch. Apr. 25, 2025).
• Id. at *1.
• Id. at *14 (holding that “[t]here is nothing intrinsically suspect about corporate insiders participating in a direct listing”). The Karp court drew upon Guttman’s warning that it would be “unwise to formulate a common law rule that makes a director ‘interested’ whenever a derivative plaintiff cursorily alleges that he made sales of company stock in the market.” See Guttman, 823 A.2d at 502.
• Karp, 2025 WL 1213104, at *2, *14.
• Id. at *21 (finding it “inequitable to consider demand futile simply because the directors made large profits selling their stock to the public”); see also Guttman, 823 A.2d at 505.
• Id. at *3, *15.
• Id. at *15 (noting that 10b5-1 plans “offer a safe harbor for corporate insiders to sell stock”); Sec. & Exch. Comm’n, Fact Sheet: Rule 10b5-1: Insider Trading Arrangements and Related Disclosure, https://perma.cc/GA9D-MWFX.
• See Grabski on behalf of Coinbase Global, Inc v. Andreessen, 2024 WL 390890, at *9 (Del. Ch. Feb. 1, 2024) (denying a motion to dismiss a Brophy claim where the plaintiff alleged the directors knew a nonpublic report “valued the Company’s stock well below its trading price when they sold into the Direct Listing”); see also Karp, 2025 WL 1213104, at *21 (distinguishing Grabski).
• See Delman v. GigAcquisitions3, LLC, 288 A.3d 692, 697–98 (Del. Ch. 2023) (describing the standard SPAC structure as a shell corporation formed to raise capital and execute a business combination within an 18-to-24-month window).
• See In re MultiPlan Corp. S’holders Litig., 268 A.3d 784, 792–94 (Del. Ch. 2022) (outlining the divergence of interests between SPAC sponsors and public stockholders); see also Michael Klausner et al., A Sober Look at SPACs, 39 Yale J. Reg. 228 (2022).
• See MultiPlan, 268 A.3dat 792.
• Delman, 288 A.3d at 713 (explaining that the sponsor “had a financial interest in consummating any business combination” because a liquidation would render the sponsor’s investment “worthless”).
• MultiPlan, 268 A.3d at 809–12.
• Id. at 791, 795, 808.
• Id. at 816 (holding that public stockholders’ redemption right was allegedly “impaired by the false and misleading information in the Proxy”).
• See Cent. Laborers’ Pension Fund v. Karp, 2025 WL 1213104, at *15 (Del. Ch. Apr. 25, 2025).
• See MultiPlan, 268 A.3d at 809.
• See Elizabeth Pollman, Startup Failure, 73 Duke L.J. 327, 330 (2023) (noting the “power law” distribution of returns where few startups succeed).
• Id. at 331 (describing the “soft landing” system).
• N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 101 (Del. 2007) (“The directors of Delaware corporations have the legal responsibility to manage the business of a corporation for the benefit of its shareholder owners[.]”); see also Quadrant Structured Prods. Co., LTD. v. Vertin, 115 A.3d 535.
• Id.
• Id. at 101.
• Id. at 101–02.
• Id. at 103 (holding that “individual creditors of an insolvent corporation have no right to assert direct claims for breach of fiduciary duty against corporate directors”).
• See, e.g., Stephen M. Bainbridge, Twilight in the Zone of Insolvency: Fiduciary Duty and Creditors of Troubled Companies, 1 J. Bus. & Tech. L. 281 (2007).
• Gheewalla, 930 A.2d at 101.
• See, e.g., Douglas G. Baird & Robert K. Rasmussen, The End of Bankruptcy, 55 Stan. L. Rev. 751 (2002) (discussing asset composition and reorganization limits); Elizabeth Pollman, Startup Failure, 73 Duke L.J. 327 (2023) (discussing startup insolvency dynamics).
• See generally SV Inv. Partners, LLC v. ThoughtWorks, Inc., 7 A.3d at 983–84.
• See In re Trados Inc. S’holder Litig., 73 A.3d 17, 39–45 (Del. Ch. 2013).
• See John F. Coyle & Gregg D. Polsky, Acqui-hiring, 63 Duke L.J. 281 (2013); e.g.,Visnic v. Seegrid Corp., 2025 WL 3049039, at *1 (Del. Ch. Oct. 29, 2025) (order denying plaintiff’s motion to compel forensic audit).
• Melanie Rovner Cohen & Joanna L. Challacombe, Assignment for Benefit of Creditors–A Contemporary Alternative for Corporations, 2 DePaul Bus. L.J. 269, 270 (1990).
• See In re Wack Jills, Inc., 322 A.3d 1132, 1145 (Del. Ch. 2024).
• See Del. Code Ann. tit. 8, §§ 280–82 (2025); In re Krafft-Murphy Co., Inc., 82 A.3d 696 (Del. 2013).
• See, e.g., Trados, 73 A.3d at 36–45; In re Nine Sys. Corp. S’holders Litig., 2015 WL 2265669, at *33–36 (Del. Ch. May 7, 2015); SV Investment Partners, 7 A.3d at 983–84 (collectively highlighting instances where distressed or underperforming companies faced intense litigation regarding board decisions that favored preferred stockholders’ downside protections at the expense of the common).
• See Abraham J.B. Cable, Opportunity-Cost Conflicts in Corporate Law, 66 Case W. Rsrv. L. Rev. 51 (2015).
• See Jesse M. Fried & Mira Ganor, Agency Costs of Venture Capitalist Control in Startups, 81 N.Y.U. L. Rev. 967, 1002–15 (2006) (discussing VC incentives in downside scenarios).
• The Court of Chancery recently addressed related issues in Shafi v. Chien,  2025 WL 671854 (Del. Ch. Mar. 3, 2025). This article does not comment on the merits of that pending matter.
• See Matthew Wansley, Beach Money Exits, 45 J. Corp. L. 151 (2019).
• See Frederick Hsu Living Tr. v. ODN Holding Corp., 2017 WL 1437308, at *18–24 (Del. Ch. Apr. 14, 2017).
• See LC Cap. Master Fund, Ltd. v. James, 990 A.2d 435, 452 (Del. Ch. 2010) (explaining that directors must pursue the best interests of the corporation and its common stockholders if that can be done faithfully with the contractual promises owed to the preferred).
• See Prod. Res. Gp., L.L.C. v. NCT Gp., Inc., 863 A.2d 772, 791 n.60 (Del. Ch. 2004) (“[T]he maximization of the economic value of the firm might . . . require the directors to undertake the course of action that best preserves value in a situation when the procession of the firm as a going concern would be value-destroying,” such that “the efficient liquidation of an insolvent firm might well be the method by which the firm’s value is enhanced.”); see also Credit Lyonnais Bank Nederland, N.V. v. Pathe Commc’ns Corp., 1991 WL 277613, at *34 n.55 (Del. Ch. Dec. 30, 1991) (“[I]n managing the business affairs of a solvent corporation in the vicinity of insolvency, circumstances may arise when the right . . . course to follow for the corporation may diverge from the choice that the stockholders (or the creditors, or the employees, or any single group interested in the corporation) would make if given the opportunity to act.”); see also Pollman, supra note 1, at 206 (discussing the potential destruction of economic and social value that may be perpetuated by startups with lackluster financial performance or compliance failures).
• See generally Steven E. Bochner & Amy L. Simmerman, The Venture Capital Board Member’s Survival Guide: Handling Conflicts Effectively While Wearing Two Hats, 41 Del. J. Corp. L. 1, 7–8 (2016).
• See In re Oracle Corp. Deriv. Litig., 824 A.2d 917, 938–47 (Del. Ch. 2003) (analyzing how shared academic, social, and professional networks in Silicon Valley may bear on independence); cf. Sandys v. Pincus, 152 A.3d 124, 131–35 (Del. 2016) (holding that close personal and professional relationships—including significant venture capital co-investment ties and co-ownership of a significant asset—can undermine a director’s independence).
• See, e.g., In re Trados Inc. S’holder Litig., 73 A.3d 17, 62–63 (Del. Ch. 2013)..
• See, e.g., In re Nine Sys. Corp. S’holders Litig., 2014 WL 4383127 at *2.
• See Delman, 288 A.3d at 727 n.254 (explaining that although there is “no duty to obtain a fairness opinion” under Delaware law, they may play an important role where conflicted directors are assessing the fairness of a transaction to public stockholders).
• Houseman v. Sagerman,, 2014 WL 1600724 (Del. Ch. Apr. 16, 2014).
• See Leo E. Strine, Jr., Documenting the Deal: How Quality and Candor Can Improve Boardroom Decision-Making and Reduce the Litigation Target Zone, 70 Bus. Law. 679 (2015).