Is it possible to have a spoiler when the story is this well known? If you don't want to know what's in the movie, don't read this post.

The Social Network begins with a frenetic exchange between Mark Zuckerberg and his soon-to-be-former girlfriend, Rachel Something, who becomes a Rosebud for the creation of Facebook. Later in the movie, Rachel utters the memorably stupid line, "The Internet's not written in pencil, Mark. It's written in ink," but that was one of the few missteps in this script. 

While the supporting actors are terrific, this movie depends on Jesse Eisenberg's portrayal of Mark Zuckerberg, and Eisenberg is terrific. I will leave the serious movie reviews to others (including Christine and Larry, who seem to have a good thing going at Illinois), but I wanted to note that The Social Network is a fabulous movie for lawyers, particularly transactional lawyers.

One of the main threads of the story is Zuckerberg's alleged theft of the Facebook idea from Cameron Winklevoss, Tyler Winklevoss, and Divya Narendra, which I blogged about over three years ago when it led to litigation. Another thread is Zuckerberg's conflict with Facebook co-founder Eduardo Saverin, which involves an attempted dilution of Severin's shares. Then there is the angel investment by Peter Thiel and the distributions of shares to various other people, including Dustin Moskovitz, whose important role in developing Facebook is cheated in the film.

In the end, however, this film is only about one person. And his Idea. That Idea is at the heart of Facebook and the movie, and watching people grasp for a piece of it is what makes this movie fun.

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Our town, Champaign, IL, is participating in Lemonade Day, a program designed to encourage entrepreneurship in children.  Here is the Champaign Lemonade Day site.  Our eight-year-old is hosting a stand with his fellow second-grade buddy and his little brother.  (I have to admit that the other boys' mom has done everything, and I've done absolutely nothing to make this happen.  And, she's an OB-GYN, and she just had her fourth child.  Not that I am competitive or guilt-ridden or anything.)

Anyway, they participated in the best-tasting lemonade contest last weekend and will host their lemonade stand in front of our house on Sunday, May 2.  They did a run-through a few weeks ago and made $60.  All of their proceeds will go to Salt & Light here in Champaign.

So, here is the value I'm adding -- there are too many rules.  I have added value by pointing this out. Here are the health & safety rules for hosting a lemonade stand as part of Lemonade Day.  After I buy new pitchers with lids and a canopy, I can teach the boys a little about start-up cost barriers of regulation.  During our run-through, we sold homemade brownies, cupcakes and cookies.  Without a license.  Maybe I'll add value by drafting a waiver.

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Forget Facebook with their Waiting for Godot IPO teasing!  Pandora may be going public. 

I'm a medium Pandora fan.  My colleague Tom Ulen showed it to me in Fall 2008, and I use it once a week or so.  If you live under a rock, Pandora (and it's competitor Slacker) let you create your own streaming radio station by plugging in an artist or a song title -- then the algorithms pick songs that would fit that artist or initial song.  You cannot ask the station to play a particular song, however.  I listen to music mostly when I'm running, though, and I can't take the uncertainty.  If I need something to inspire me to finish strong, Pandora may give me something less than inspiring.  Once I set up a "Thriller" station, and I had "Don't Stop Believing" followed by "Don't Stand So Close to Me."  That made me wonder if the algorithm used as a characteristic "the first six letters in the title."

What I found interesting about the article, though, was it's description of the founder, Tim Westergren, and his search for capital during its pretty lean first 10 years.  The article quotes one of his eventual venture capital investors as saying

“The pitch that he gave wasn’t that interesting,” Mr. Marcus said. “But what was incredibly interesting was Tim himself. We could tell he was an entrepreneur who wasn’t going to fail.”

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I posted this in October, but I am moving it up as a reminder ...

Darian Ibrahim, Brian Broughman, and I are organizing a "conference within a conference" for the next Law & Society Association Annual Meeting in Chicago, Illinois on May 27-30, 2010. The LSA's call for papers is here. Our goal is to assemble several paper panels of scholars who are doing work relating to law and entrepreneurship (broadly defined). We welcome not only legal scholars, but also scholars in other disciplines.

While much of the work at LSA is empirical -- and we encourage the submission of such proposals -- we also encourage other proposals.

This year the LSA is soliciting proposals for projects in the early stage of development that could be presented at work-in-progress sessions. We would be interested in developing a proposal for such a session focused on law and entrepreneurship, so please feel free to submit such projects to us.

You may submit a proposal to any of us via email, but as a default matter, please send your proposal to Gordon Smith by November 30, 2009.

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Here is a new economics paper that might be of interest to Gordon and the rest of you out there interested in law & entrepreneurship: Azoulay et al., "Incentives and Creativity: Evidence from the Academic Life Sciences". Here is the abstract:

Despite its presumed role as an engine of economic growth, we know surprisingly little about the drivers of scientific creativity. In this paper, we exploit key differences across funding streams within the academic life sciences to estimate the impact of incentives on the rate and direction of scientific exploration. Specifically, we study the careers of investigators of the Howard Hughes Medical Institute (HHMI), which tolerates early failure, rewards long-term success, and gives its appointees great freedom to experiment; and grantees from the National Institutes of Health, which we are subject to short review cycles, pre-defined deliverables, and renewal policies unforgiving of failure. Using a combination of propensity-score weighting and difference-in-differences estimation strategies, we find that HHMI investigators produce high-impact papers at a much higher rate than two control groups of similarly-accomplished NIH-funded scientists. Moreover, the direction of their research changes in ways that suggest the program induces them to explore novel lines of inquiry.

What might this mean for law? Shooting from my hip, it might imply that companies that are subject to short-term pressures to produce (either because of the types of investors, the incentives of managers, or incentives created by corporate law) might produce less long term innovation. Any thoughts, Gordon, on what might be the results of a study of similar start-up companies backed by v.c. funds with different horizons?

What might this mean should law firms invest more in r&d? The best results may require a longer gestation.

Something for scholars to think about too in our own scholarship.

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My research has focused on how sophisticated entrepreneurial parties – including angel investors, venture capitalists, venture lenders, and entrepreneurs – structure their relations, and how the corporate, securities, and commercial laws respond to their unique needs. In my venture debt paper, I discuss how lender liability and equitable subordination rules shape venture lender practices. In this post, I’ll focus on the securities laws.

First, there’s the exit structure of venture capital (with credit to Gordon for an excellent paper of the same name). In the past, hot IPOs allowed VCs to return big gains to their fund investors. In this recent public policy proposal (click on the Apr. 29, ’09 doc), the National Venture Capital Association laments that there were only six IPOs total in the U.S. in 2008. The securities laws aren’t helping the situation. As Larry Ribstein and others have observed, the costs of going public thanks to Sarbanes-Oxley have dampened the IPO market, and there’s a legal minefield we teach in the securities course known as the gun-jumping rules that makes the IPO process far more cumbersome and error-prone than the process for seasoned public offerings. Sure, a start-up needs to provide more disclosure than Microsoft, but it’s not like no one has vetted these companies. They have been subject to rigorous and repeat scrutiny from (venture) capital markets from their inception. Why are the gun-jumping rules so complex?

Second, long before exit, private placement rules and broker-dealer laws might be impeding optimal levels of funding from angel investors, the precursor to venture capital. In my last paper, Financing the Next Silicon Valley, I explored both the ban on general solicitations in private placements and the reach of the broker-dealer laws to see whether angels had reason to fear the application of these laws to their activities. I concluded that there is a plausible case that the letter of these laws, if not the spirit, are indeed violated by routine angel group practices. First, when entrepreneurs approach angels (and VCs) without a “preexisting relationship,” as they do whenever they send a business plan cold, there appears to be a general solicitation. This leads to a host of potentially bad outcomes including recission rights, dissuading follow-on VC financing, and delaying an IPO. Second, when individual angels take the lead on a start-up’s due diligence for their group and receive extra stock in the start-up as compensation, they arguably fit within the definition of a broker-dealer. I can’t imagine that the broker-dealer laws were meant to apply to this situation, and granted the SEC hasn't enforced either of the laws I mention (to my knowledge), but the cloud of uncertainty they hang over angel group practice certainly isn’t enticing more angel investments, at least according to my sources.

Bottom line: with our traditional economic engines like Wall Street finance and the auto industry in crisis, we need start-ups more than ever, and there won't be start-ups without angels and VCs. Market forces have already hit these investors hard; the securities laws shouldn’t exacerbate the problem. The SEC and Congress should re-examine these laws and ease up a bit to help keep our entrepreneurial culture going strong.

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Thanks to Gordon for his nice words about my new paper on venture debt, and for his great help whipping it into present form (a new version just went up on SSRN). When I started the paper, I remember a friend warning me that “debt is not sexy.” Worse, the financial crisis has given debt a bad rap. Yes, consumers may take on too much debt, but don’t believe all the naysayers. Debt is awesome. It is extremely important in financial markets. Even in the start-up world my paper explores, where equity from angel investors and venture capitalists dominates, the use of debt makes for a fascinating story. Start-up companies have no track records, no positive cash flows, no tangible collateral, and no personal guarantees from entrepreneurs, yet are able to attract billions of dollars in loans each year. How is that possible? Read the paper to find out. Long live debt!

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Anne Miner is giving the opening remarks at a conference entitled "Technology Entrepreneurship and Institutions: Contemporary and International Research," which is being held at the University of Wisconsin in Madison. A trip back home for me, and a nice reunion with Anne, Masado Ueda, Timo Goeschl, and others.

Anne's central point -- one that I heard her make often during my time in Madison -- is that  entrepreneurship scholarship of the sort she is interested in promoting is not like car repair. The point of entrepreneurship scholarship of this sort is not to produce a how-to manual, but to understand the forces that drive entrepreneurial behavior. Of course, causal theories are nice, and as we develop them, society will benefit. But we shouldn't expect to find a "secret sauce" that can turn any region into the next Silicon Valley. Indeed, Anne asserts that there is no secret sauce.

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Two economists at the Kauffman Foundation, Robert Litan and Tim Kane, have started Growthology, a new blog on entrepreneurship and economic growth.  Gotta love the name.  The Kauffman Foundation announcement is here.

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The NYT suggests that Ireland's recent entrepreneurial success is the "culmination of nearly four decades of government policies." Here's the formula:

The government rewrote its tax policies to attract foreign investment by American corporations, made all education free through the university level and changed tax rates and used direct equity investment to encourage Irish people to set up their own businesses.

In addition, there was the fact that Ireland is a member of the European Union. What, exactly, has the EU contributed?

One reason for many changes in Ireland is its membership in the European Union, which has brought new perspectives and regulations from its governing councils in Brussels.

New perspectives and regulations? "Perspectives" seems to refer to the fact that some Irish entrepreneurs are transcending Ireland's borders. Of course, that is not just a matter of perspective, but a matter of free movement of goods and services across EU member state borders.

The EU "regulations" referred to in the story aren't new rules designed to promote entrepreneurship, but rather new rules that, for example, aim to improve worker health and safety, thus creating business opportunities for compliance firms. One firm's burden, another firm's treasure.

Of course, all of the EU benefits inure to every member state, so what makes Ireland special? Is it really just a matter of reducing taxes, providing free higher education, and making direct government equity investments? This paper suggests a more complex answer for Ireland:

Regional transformation through technology-based entrepreneurship cannot be easily measured by solely by 'tangible' resource input factors such as access to seed capital or telecommunications infrastructure. Instead, it is important that policy makers need to recognize the importance of fostering a 'bottom-up' approach towards technology-based entrepreneurship especially the role of 'intangibles' such as role models, culture towards risk and failure, and leadership in stimulating technology based entrepreneurship in regions.

I am not trying to suggest that the academics are spot on about Ireland while the NYT reporters are hopeless simpletons. But I believe that finding the root causes of entrepreneurship is a difficult task. In the end, I tend to give more credit to the accounts that describe a stew with many ingredients than the linear cause-and-effect stories.

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Yesterday at the University of Wisconsin Law School, a group of legal scholars gathered to discuss "law and entrepreneurship." Anne Miner, my colleague in the UW Business School, launched the day with a discussion of "What is Entrepreneurship?" in which she mapped to progression of that field of study. Here I am with Anne after her session:

The morning was devoted to teaching law and entrepreneurship, and the afternoon was filled with paper presentations. In between, we took an impromptu hike along Lake Mendota:

Left to right: Vic Fleischer, Mike Guttentag, Usha Rodrigues, Bob Lawless, Gordon Smith, Darian Ibrahim, George Geis, Bobby Bartlett, and Brian Broughman.

At the end of afternoon session, Mike Guttentag provided the recap of what we had learned, though I am not sure you can get that from the whiteboard:

We finished the day on Capitol Square at The Old-Fashioned, which provided an authentic Wisconsin experience, including fried cheese curds. Dan Burk, who will be speaking at the companion conference entitled Technology Entrepreneurship & Institutions: Contemporary & International Research, met us for dinner.

A good time was had by all.

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This past summer, I posted some preliminary thoughts on "law and entrepreneurship" as a field of study. Since then I have been reading more of the entrepreneurship canon, and working with my finance colleague, Masako Ueda, on a project, the first product of which I will post on SSRN later this week. My views on "law and entrepreneurship" have evolved. Here are some paragraphs (sans footnotes) from a draft of my paper with Masako:

Joseph Schumpeter famously identified the “process of Creative Destruction” as the “essential fact about capitalism.” In Schumpeter’s view, the entrepreneur is the agent of creative destruction, and the distinguishing attribute of entrepreneurial activity is novelty. Entrepreneurs create new products, improve the manufacture of existing products with new methods, exploit new sources of supply, and develop new forms of organization.

According to Schumpeter, entrepreneurial activity “constitutes a distinct economic function” because its very novelty ensures that it transcends the present body of understanding and because society resists novelty, thus requiring of the entrepreneur the distinctive skill of “getting things done.” Schumpeter’s prediction that entrepreneurs would become obsolete seems passé in the wake of the revolutionary technological developments of the past few decades, but getting novel things done remains at the heart of modern conceptions of the entrepreneurial process.

Though entrepreneurship as a distinct field of research is still searching for an identity, entrepreneurship scholars gradually are forging a consensus about the core commitments of the field. In describing the entrepreneurial process, for example, scholars typically focus on “the discovery and exploitation of profitable opportunities.” Novelty is inherent in such opportunities, and “entrepreneurship is the mechanism by which society more fully appreciates its investment in the creation of new knowledge, such as research and education.”

...

We restrict our attention to “the discovery and exploitation of profitable opportunities” by new firms and exclude entrepreneurial activities by established firms from our definition of entrepreneurship. The latter is sometimes called “intrapreneurship." Scholary interests in intrapreneurship are clustered around the issue of how to circumvent organizational inertia in established firms and to get novel things done, as opposed to conducting routine business. Important issues in entrepreneurship by new firms arise from lack of experience and resources, which established firms usually possess. Given these significant differences between intrapreneurship and entrepreneurship by new firms, we gain little from mixing the two forms of entrepreneurship together.

Our conception of “law and entrepreneurship” follows naturally from the foregoing description of entrepreneurship and encompasses positive law (including constitutions, statutes, and regulations), common law doctrines, and private ordering that relate to “the discovery and exploitation of profitable opportunities by new firms.” While much entrepreneurship research focuses on the characteristics of entrepreneurs or on the performance of entrepreneurial firms, law and entrepreneurship studies should focus on the legal structure and regulation of entrepreneurial firms. Many entrepreneurship scholars emphasize the importance of organization to the study of entrepreneurship.

Of course, as always, comments are most welcome.

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We're off to the races here in Colorado ... classes start today.  For anyone who may be interested, I've put together a website with my course info, research pages and my research agenda, Deals and Venture Capital resources pages, and so on.  The site is still kinda buggy, but I'm working on it.  I'm new to using Dreamweaver and html (or web development of any kind beyond blogging), so any suggestions would be most welcomed. 

The home page is http://spot.colorado.edu/~fleischv/ or, if you prefer the more blatantly self-promoting URL, victorfleischer.com.

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The study of entrepreneurship in law schools is primitive. While legislatures, regulators, and courts sometimes tailor rules to small or emerging businesses, law typically is not organized according to whether the regulated actor is an entrepreneur. As a result, scholars who aspire to study "law and entrepreneurship" must confront the fundamental challenge of defining their field.

The word "entrepreneur" is derived from the French word entreprendre, which means "to undertake." An entrepreneur, therefore, connotes "one who undertakes." Implicit in this general description of an entrepreneur is the existence of an opportunity that the entrepreneur is attempting to exploit.

Opportunities sometimes are portrayed as gemstones: a valuable item that is to be discovered by the entrepreneur. Others portray opportunities as inventions: they are meant to be created. Under either characterization, however, the entrepreneur does not rest once the opportunity is identified. The process of exploiting the opportunity is the essence of entrepreneurship, and this process inevitably leads to the creation of organization:

At the most general level, entrepreneurship is the creation of value through the creation of organization. Entrepreneurs discover, invent, reveal, enact, and in other ways make manifest some new product, service, transaction, resource, technology, and/or market that has value to the community or marketplace…. [T]he process of creating value operates through the creation of a multiperson system (organization) that transforms input such as materials, money, and time into output such as product and services. Excluded are the activities of the solely self-interested (the clever thief and the con artist) and those who create without deliberate and choiceful organizing of human resources (e.g., artists, inventors, and solo-self-employed professionals). Included are those who start a business or nonprofit agency and those who transform (acquire, redirect, restructure, and "turn around") existing organizations so they add new values to the community or marketplace. (Barbara J. Bird, Entrepreneurial Behavior 3 1989).)

The domain of "law and entrepreneurship" follows naturally from this understanding of entrepreneurship. "Law and entrepreneurship" is, at root, the study of the legal structure of organizations. This study includes the contracts, statutes/regulations, and common law doctrines that apply to the formation, governance, and termination of organizations.

If you are still reading, you may be wondering why I feel impelled to organize the study of "law and entrepreneurship." The explanation is that our understanding of the legal structure of organizations is lumpy (e.g., we understand a lot about public corporations and venture capital relationships, but relatively little about strategic alliances) and incomplete (i.e., empirical studies of organizations tend to focus on a narrow range of questions). By searching for coherence across various types of organizations and asking a broader range of questions about those organizations, I believe that we can improve our understanding of the role of law in shaping organizations of all type. This is the motivation for my interest in empirical studies of relational contracts.

With that background, does the notion of "law and entrepreneurship" articulated above seem like a  sensible first step at defining the field? I realize that the definition is very broad, including, among other things, the entirety of "business organizations" law. But why not consider business organizations a sub-field of "law and entrepreneurship"? Under what theory are the formation, governance, and termination of partnerships, corporations, and other limited liability firms outside the scope of "law and entrepreneurship"? And if the study of those business forms were connected in more meaningful ways to other organizations, wouldn't that be a good thing?

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If you have fond memories of the late 1990s, check out the Business Plan Archive. Here is the description:

Welcome to the Business Plan Archive.  In partnership with the Library of Congress, the Center for History and New Media, and the University of Maryland Libraries, the Archive collects and preserves business plans and related planning documents from the Birth of the Dot Com Era so that future generations will be able to learn from this remarkable episode in the history of technology and entrepreneurship.

Registration is required, but this is a great resource for people who study entrepreneurship.

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