Entrepreneurial action is the central idea that motivates the study of law and entrepreneurship.1 Promoting entrepreneurial action is a fundamental goal of the US legal system.2 Although existing definitions of entrepreneurial action are legion,3 these definitions have been difficult to operationalize in a legal context because the application of legal rules does not turn on whether someone is acting as an entrepreneur.4 In this chapter, therefore, we offer a new conception of entrepreneurship that is consistent with understandings of entrepreneurship in other disciplines while being accessible and meaningful to legal scholars. We assert, in simplest terms, that the core function of entrepreneurs is to challenge incumbency.

We live in a time of fast-paced change and societal upheaval. Whether it’s choosing whom to vote for, documenting personal stories, finding friends and spouses, commercializing personal assets, or creating innovative products and services, traditional behaviors have given way to new opportunities and methods of accomplishing these activities. Moreover, these goals can be accomplished much more quickly than was ever possible previously. As a result, the existing structure of laws and rules that benefit society by ensuring, inter alia, public safety, competitive markets, environmental health, and access to justice for all, have come under increased pressure. The clash is most visible in the public confrontations between companies in the sharing economy and the state and local governments that have been on the front lines as entire industries have been disrupted.

On December 17, 2010, Mohamed Bouazizi was operating a fruit stand in a large market in Tunisia. At ten o’clock in the morning he watched as local inspectors took his digital scale and several crates of apples and bananas. The seizure was his price for refusing to concede to their bribery demands.1 An hour later, Mr. Bouazizi set himself on fire in front of a public administration building. He died two weeks later.

Entrepreneurship may entail innovation and disruption, but ideas need businesses to effectuate them, and businesses require financing. Financing inevitably entails regulation – securities regulation. Securities law has never been static, but it has evolved rapidly and in a complex dynamic between Congress and the Securities and Exchange Commission (SEC). These two bodies create the rules of the road for entrepreneurs who grapple with the challenges of raising capital. Entrepreneurs being entrepreneurial, they naturally will seek to disrupt the regulatory status quo. What should Ms. Entrepreneur seek when she goes to Washington? History makes clear that as important as getting legislation passed is knowing the optimal shape of that legislation. In this chapter I’ll use the history of financial regulation to articulate the distinction between legislation that dictates and legislation that delegates – and explain why the former is more attractive to the entrepreneur than the latter.

The supply of human organs for transplantation might seem an unlikely place to begin thinking about entrepreneurship. After all, there is no production market for human organs. With the surprising exception of Iran, legal rules around the world make the sale of human organs for transplantation a criminal offense. Moreover, at first blush the social organization of the organ supply and the transplant system more generally seem quite far removed from the world of entrepreneurial innovation. In general, organ transplants are strongly regulated, allocation rules are governed mostly by medical criteria rather than supply and demand, and most people’s conception of the system’s organizing principle is based on an understanding of organ donation as a special, even sacred, sort of gift – the “gift of life.” The market seems a long way off. While proposals for creating transplant markets have been made periodically since the 1980s, the casual observer could be forgiven for thinking that entrepreneurship was of little conceptual use in understanding the transplant field, and vice versa.

Controlled companies have been characterized as outmoded “relics of an earlier era.”1 According to this view, prevalent since the middle of the twentieth century, evolution toward “widely held distribution of stock ownership and control” is “inevitable.”2 And yet real-world practices remain stubbornly resistant to expert forecasts.3 Many of the nation’s and the world’s largest businesses are family controlled.4

How should entrepreneurship and innovation policy account for the fact that different firms have different access to capital? Large established firms with ready access to capital can more easily claim tax and other legal incentives. But there is no reason to think that large, established firms are best suited to the pursuit of entrepreneurial goals. To the contrary, new firms, such as resource-constrained startups, may have an advantage when it comes to pursuing entrepreneurship and innovation.1

Congress is currently considering regulatory reforms to facilitate the creation of venture exchanges – securities markets specifically designed for trading smaller and younger firms.1 These exchanges are seen as a way to provide liquidity to such firms and rejuvenate flagging US public markets. While the concept is relatively straightforward, designing the regulatory framework to support venture exchanges implicates difficult questions about listing standards, market microstructure, and investor protection.

One set of underexplored issues in the entrepreneurship literature is at what point entrepreneurial firms grow and become the acquisition targets of larger firms in the same industry versus situations where such entrepreneurial firms develop contractual relations with such larger firms, and what role law has in this process. The basic problem for an entrepreneurial firm is that such a firm lacks capital, distribution networks, an effective sales force, or knowledge of manufacturing to reap the gains of its innovations. In a world short of acquisition, vertical contractual relations provide an entrepreneur the ability to create new opportunities that the entrepreneurial firm on its own may not be able to capture. Consequently, entrepreneurial firms look to larger and more established firms for “strategic alliances” to fill these gaps.1

Innovative startups of the early twenty-first century have frequently made headlines not just for their exuberant valuations, but also for their collaborations and entanglements with the law, including state and local regulators.1 Whereas startups of the previous generation pioneered the Internet and raised novel legal questions about the Wild West of the virtual world,2 the recent batch of startups has disrupted existing industries, inciting political pushback from incumbents and bumping up against regulatory frameworks governing business activity.

The business judgment rule can be justified on multiple grounds, ranging from concerns with hindsight bias, to doubts about judicial expertise, to worries about excessive director caution (and this is an incomplete list). We can also understand this rule as a mechanism to facilitate entrepreneurial action. In part, this is a product of the normal operation of the rule, with its high level of judicial deference. It is also a consequence of the rule’s limited exceptions, and the courts’ reluctance in adding new ones. I will focus in particular on the rejection of external benchmarks for measuring the reasonableness of a business judgment.