Burned Angels: The Coming Wave of Minority Shareholder Oppression Claims in Venture Capital Start-up Companies

This article analyzes the claims angel investors might bring against venture capitalists who took companies through insider rounds with “abusive” terms. Part II introduces the concept of close corporation law, well-established in American jurisprudence, and concludes that venture-backed start-up companies would likely be treated as close corporations in the eyes of the courts. Part III then presents what has become known as the close corporation “minority oppression doctrine,” outlining a set of principles courts have established to protect minority shareholders in close corporations from the potential abuses of a controlling shareholder group, such as that comprised of VC investors. Particular attention is given to jurisdictions likely to address venture capital shareholder issues first, namely Massachusetts, California, New York, and, of course, Delaware. Part IV describes in more detail the role angels play as investors in nascent and early-stage companies, their motivations and expectations when making their investments, and the specific areas where risk of abuse against them is high. Part V applies the minority oppression doctrine to the plight of angels in venture-backed startup companies, concluding that courts will likely recognize a claim of oppression by an angel plaintiff, but the substantive result may vary depending on the jurisdiction in which the suit is brought and the particular facts of a case. Finally, Part VI prescribes specific actions venture capitalists may take to reduce their liability in the face of such claims. The article concludes by suggesting that angel investors may be able to bring successful claims against venture capital investors based on some variant of the minority oppression doctrine in each of the jurisdictions reviewed. However, there are certain steps venture capital firms can take before and during a dilutive transaction to help sanitize their actions and defend themselves.