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.

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

This chapter offers a new explanation for mandatory fiduciary protections in certain business relationships—the preservation of trust that might otherwise be eroded through the bargaining process. Any contract a hypothetical entrepreneur and an investor might enter would inevitably be incomplete and give rise to potential opportunistic behavior. While the parties could draft a more detailed agreement prohibiting various forms of opportunism, the very act of bargaining over these protections could undermine whatever trust existed between the parties at the outset of their relationship. By contrast, a prohibition limiting opportunism in state-imposed fiduciary obligations removes the invocation of distrust by either party to the agreement. Fiduciary protections, however, do not provide a perfect solution in all business relationships. Although fiduciary duties can usefully constrain opportunism and preserve trust in vertical business relationships, such as in a simple principal-agent arrangement, other situations involve complexity that pose challenges for fiduciary law. We illustrate this observation with examples of various horizontal conflicts, or diverging interests, in the venture capital-backed startup context. To the extent that contract and fiduciary law are each incomplete, a residual domain for trust and other mechanisms for risk reduction or self help remains.