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.

In recent years, much media and scholarly attention has focused on social entrepreneurship and the ways that the law can help or hinder those launching new ventures that seek to combine doing good with doing well. Prominent examples of such ventures include Mark Zuckerberg and Priscilla Chan’s public discussions about how best to dedicate 99 percent of their Facebook stock to charitable endeavors and the decision of Kickstarter’s founders to forego going public in favor of making a legal commitment to pursue goals other than maximizing profits.1 New, so-called hybrid, legal forms such as the benefit corporation and the low-profit limited liability company have arisen to accommodate these new ventures in the United States, and debate continues over the benefits and obligations of such new entities.

The term entrepreneur comes from the French word entreprendre, which signifies “one who undertakes innovations.” That underlying innovative nature typifies entrepreneurship’s vital role in our economy, contributing to both economic growth and industry progress. Many states affirmatively support entrepreneurship through tax credits, subsidies, and awards, as well as by sponsoring incubators and accelerators. And yet, despite this public policy favoring entrepreneurship, human capital law – which lies at the intersection of intellectual property, employment regulation, and contract law – has developed in ways that often curtail that very same entrepreneurial activity. Post-employment restrictions, both contractual and regulatory, particularly limit the ability of the most experienced professionals to find, or even join, new ventures. This chapter explores the discordant, contradictory nature of state policies favoring both entrepreneurial venture and human capital law, and argues against the counter-productive expansion of restrictions on talent mobility. It first discusses the general disadvantage startups face in litigation brought by incumbents as well as the rise in intellectual property disputes and their effects on entrepreneurship. The chapter then presents the particular cost of human capital legal disputes on entrepreneurial spinoffs, that is, companies founded by former employees of competitors.

The conference that prompted the publication of this volume was motivated by a simple idea, that the core function of entrepreneurs is to challenge incumbency. The novelty inherent in entrepreneurial action implies uncertainty, and hence experimentation, learning, and selection. We invited conference participants to explore issues such as: the incentive effect of legal rules on startup activity; the role of private ordering in facilitating or impeding entrepreneurial action; the influence of legal rules and practices on the creation of entrepreneurial opportunities; the role of law in promoting or foreclosing market entry; or the effect of entrepreneurial action on legal doctrine. This volume is the result of that invitation.

Before he was appointed to his long-lasting seat on the Supreme Court, William O. Douglas (WOD to his entourage, apparently) was Chairman of the Securities & Exchange Commission. His tenure was productive and aggressive, taking on “the moneyed interests” harder than either of his two New Deal predecessors.1 Two subsequent SEC chairs, William Cary and Arthur Levitt, called Douglas their hero and inspiration. In the 1990s, Levitt put Douglas’s quote committing the SEC to be “the investor’s champion” against the forces of greed on the home page of the Commission’s new website.2

The literature on financial contracting highlights a risk of opportunism by whichever party controls the firm.1 If the entrepreneur retains control of the business she may pursue private benefits (e.g., the joy of running her own business) at the expense of financial returns. To address this concern, investors may demand control rights as a condition of financing.2 However, this merely flips the problem, since now investors may use such control to behave opportunistically toward the founders or other constituents of the firm.3 In the context of entrepreneurial finance such problems are magnified by the fact that financing contracts are inherently incomplete and cannot specify the firm’s action for every contingency that might arise.4 While legal constraints – such as fiduciary obligations – may mitigate the risk of controlling party opportunism, the law provides an imperfect solution at best and cannot eliminate opportunistic behavior within entrepreneurial finance.5