Cross-posted at SocEntLaw. 

This is my third and final substantive post comparing the Model Benefit Corporation Legislation (the “Model”) to the proposed Delaware Public Benefit Corporation (“PBC”) amendments.

"Branding" is one area where proponents of the Model may argue that the Model is better than the PBC.  As mentioned in my first substantive post, the PBC favors private ordering more than the Model, which makes the PBC more flexible, but also makes it more difficult to maintain a consistent brand.  Branding could be useful to investors, consumers, and governments that wish to quickly identify socially responsible companies. 

Some proponents of the Model may point to the required annual report (PBC only requires a biennial report) and the requirement of measuring general public benefit against a third party standard (optional under the PBC) as building the Model’s brand.  In my opinion, however, neither the required annual report nor mandatory use of a third party standard is likely to facilitate creation of a useful brand under the current language of the Model. 

First, the Model does not expressly provide an enforcement mechanism for assuring the public posting of an annual report and the use of a third party standard.  Currently, a number of benefit corporations are in violation of the statute, but nothing seems to be done about the violations.  Second, most of the few annual reports available are full of fluffy self-promotion and do not include much of value.  Third, the available third party standards vary wildly, so simply requiring a third party standard is not likely to lead to a consistent and valuable brand.  The updated version of the Model requires that the third party standard be “comprehensive,” “independent,” “credible,” and “transparent,” but those requirements will be difficult to enforce and, in any event, do not appear aimed at creating a consistent brand.  A benefit corporation that does not see the value in using a third party standard may use the lowest standard available, provide little to no useful information to the market, and waste company resources in the process. 

If the Model proponents wished to create a brand via statute they would do better requiring an annual charitable giving floor and a partial asset lock, as I suggest here.  In my opinion, however, the heavy lifting in the branding department of social enterprise should be left to private organizations like B Lab.  The social enterprise space is evolving quickly, and I think it unlikely the state governments would keep up with the changes and engage in the type of enforcement needed to maintain a valuable brand.  Also, the term “social good” means very different things to different people, and therefore it is likely better to have private organizations develop various standards and allow the market to determine which standards, if any, are useful and valuable. 

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One of my colleagues said that my latest article (written with one of my excellent students, Jordan Lee) sounds like an R-rated movie. The title is Discretion, and here is the abstract:

Discretion is an important feature of all contractual relationships. In this Article, we rely on incomplete contract theory to motivate our study of discretion, with particular attention to fiduciary relationships. We make two contributions to the substantial literature on fiduciary law. First, we describe the role of fiduciary law as “boundary enforcement,” and we urge courts to honor the appropriate exercise of discretion by fiduciaries, even when the beneficiary or the judge might perceive a preferable action after the fact. Second, we answer the question, how should a court define the boundaries of fiduciary discretion? We observe that courts often define these boundaries by reference to industry customs and social norms. We also defend this as the most sensible and coherent approach to boundary enforcement.

I wrote an article about a decade ago called "The Critical Resource Theory of Fiduciary Duty" that still gets downloaded and cited a fair amount, at least for a fiduciary duty article. It is about the structure of fiduciary relationships, and I wanted to do a follow on article about how courts know when someone has breached a fiduciary duty. I actually had a fairly long draft of an article that was just horrible, and I never published it, but I kept thinking about and teaching about this problem. Earlier this year, I had a brainstorm about the subject, and the result is this new article. 

By the way, interest in fiduciary law seems to have exploded in the past decade. Some of that interest stems from Tamar Frankel's book and the accompanying conference at Boston University. Some of the interest stems from the fact that fiduciary law is interesting in many countries outside the United States, where much of the best writing on this subject is found (see Paul Miller, for example). I look forward to a new surge in interest this summer, as Andrew Gold and Paul Miller have organized an excellent conference on The Philosophical Foundations of Fiduciary Law, to be held in Chicago. I am writing a paper entitled "True Loyalty" for that conference and very much looking forward to reading the other contributions.

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Just posted:

'Opportunity' is a central concept in entrepreneurship research, and this Article explores the relationship between law and entrepreneurial opportunities. We adopt the widely held view that entrepreneurial opportunities are ideas created by entrepreneurs, rather than resources waiting to be discovered. Of course, as with all products of the imagination, entrepreneurial opportunities draw on existing resources for inspiration, and we contend that some legal systems are better than other legal systems at encouraging entrepreneurs to think about existing resources in new ways. We also contend that when entrepreneurial opportunities are exploited, the inventory of resources expands, thus laying the foundation for the creation of more entrepreneurial opportunities. This 'opportunity cycle' leads to plentiful and continuous opportunity creation.

Legal rules play an important role in each stage in the opportunity cycle, and two sets of stories told about law are foundational to innovation research. The first is that property rights (i.e., rights to exclude) are essential in the development of innovative resources because property rights assure market participants that they can retain many of the benefits of their success. The second is that various sets of legal rules – including laws limiting barriers to entry, bankruptcy laws, and corporate laws relating to limited liability and asset partitioning – reduce the costs of entrepreneurial action and failure, thus emboldening entrepreneurs to exploit opportunities. Our thesis is that all of these stories are part of a grander tale about the opportunity cycle, and the central theme of that tale is that the promotion of entrepreneurial action is a fundamental value of the U.S. legal system, the expression of which through positive law inspires entrepreneurs to create more opportunities.

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If you are at Law & Society this Friday and Saturday, come to the mini-conference on Entrepreneuship & Law that Brian Broughman (Indiana - Maurer School of Law) and our own Gordon Smith (BYU) have organized.  Here is the line up:

Friday, June 3, 2011

8:15 am to 10:00 am Regulating Entrepreneurs 2122 (Chair: Brian Broughman)

• Mira Ganor (Texas), The Power to Issue Stock
• Erik Gerding (New Mexico), Shadow Banking, Financial Innovation, and Regulatory Arbitrage
• Michelle Harner (Maryland), Mitigating Financial Risk for Entrepreneurs
• Poonam Puri (Toronto), The Regulatory Burden of Corporate Law
• Discussants: Kristin Johnson (Seton Hall) & Sarah Lawsky (UC Irvine)

12:30 pm to 2:15 pm Governance Structure of Entrepreneurial Firms 2322 (Chair: Brian Broughman) 

• Brian Broughman (with (Jesse Fried & Darian Ibrahim), Delaware Law as Lingua Franca: Evidence from VC-Backed Startups

• George Geis (Virginia), Organizational Contracting and Third Party Rights
• Alicia Robb (Kauffman Foundation), Entrepreneurial Finance and Performance: A Transaction Cost Economics Approach
• Discussant: Bobby Bartlett (UC Berkeley) 

Saturday, June 4, 2011

8:15 am to 10:00 am Law, Entrepreneurship, and Innovation 3116 (Chair: Gordon Smith)

• Mike Burstein (Harvard), Exchanging Information without Intellectual Property

• Sean O’Connor (Univ. of Washington), Transforming Professional Services to Build Regional Innovation Ecosystems
• Peter Lee (UC Davis), The Accession Insight and Patent Infringement Remedies
• Karl Okamoto (Drexel), Law and Entrepreneurship: An Assessment Approach

4:30 pm to 6:15 pm Global Entrepreneurship 3519 (Chair: Gordon Smith)

• Afra Afsharipour (University of California, Davis), US Private Equity Investments in India

• Sofia Johan (York Univ.)(with April Knil and Nathan Mauck), Determinants of Sovereign Wealth Fund Investment in Private Equity
• Gordon Smith, Stability and Adaptability

###

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Gearing up for the Facebook movie in October, I am reading The Facebook Effect: The Inside Story of the Company That Is Connecting the World by David Kirkpatrick. As I have mentioned before, I love business histories, and this one is very good, even if Kirkpatrick falls victim to the bane of many business historians: infatuation with the subject company. 

Only one-third of the way through the book, I am surprised by the number of legal actions generated by Zuckerberg and his merry men. (So far in the story, all of the employees of the company are men.) We have heard a lot about the Winklevoss/Narendra claims, and the book mentions several other people who lay in Facebook's wake. 

But it doesn't mention Paul Ceglia, the man who now claims to own 84% of Facebook based on a contract that Mark Zuckerberg signed in 2003. You can see a copy of the contract Ceglia filed with the court here. Take a look at Paragraph 3, which states, "The agreed upon completion for the expanded project with working title 'The Face Book' shall be January 1, 2004 and an additional 1% interest in the business will be due the buyer for each day the website is delayed from that date." Ceglia claims that Zuckerberg was late with his work, but eventually delivered after Celia had reached an 84% ownership share.

Facebook's response to this claim has been less than confident. Originally Facebook's lawyer told a federal district court judge, "Whether [Mark Zuckerberg] signed this piece of paper, we're unsure at this moment." The next day, Zuckerberg was trying to clarify that statement: "If we said that we were unsure, that was likely taken out of context, because I think we were quite sure that we did not sign a contract that says they have any right to ownership over Facebook." The following day, Facebook gave it one more try, this time through a company spokeman:

Mark has made it clear that Ceglia's claims are absurd and we strongly suspect the contract is forged. However, we have not seen the original (no one has, including the court). Thus, we're focusing on the things that are not open to interpretation and are indisputable--Mark could not have given interest in a company that didn't exist or and idea he had not thought of yet and, even if he could, the statute of limitations has expired.

"Strongly suspect the contract is forged"?

On the other side, Ceglia claims that he simply forgot about the contract, but he discovered it recently when looking through his files as he prepared to defend himself against charges of fraud in connection with his wood pellet business. Plenty of reporters are looking into Ceglia checkered business career, but I suspect his 15 minutes of fame have almost expired, even if the contract is authentic. Even if Zuckerberg had a project called "The Face Book" that somehow involved Ceglia, it seems unlikely to me that the same project ultimately became "TheFacebook" (and later just "Facebook").

The other twist in this story is that another person is claiming to own Facebook through Paul Ceglia: "Andrew Logan, StreetDelivery’s founder and CEO ... claimed Ceglia was under contract to StreetDelivery in 2003 when he set up StreetFax and hired Zuckerberg. If Ceglia’s contract with Zuckerberg gives Ceglia an ownership interest in Facebook, that interest may belong to Logan, he said.... 'We’re going to lay claim that I own it,' said Logan. 'He was under contract to me."

Don't get your hopes up, Andrew.

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Last week I spent three-plus days in the lovely city of Providence, Rhode Island as a visiting faculty member of the Brown International Advanced Research Institute (BIARI) on Technology Management and Entrepreneurship. With the possible exception of Mark Suchman -- a "law professor without portfolio" -- I was the only law professor in attendance, but it was well worth my time. In addition to finding a wonderful cheese shop in Providence, I was able to hear entrepreneurship and management scholars discuss their work. I was reminded that legal scholars, especially legal scholars who study organizations, have much to learn about organizations and entrepreneurship from our colleagues in business schools and sociology departments. (We also have a lot to learn from economists, but we are already tapped into that scholarship in meaningful ways.) The sociologically orientated organizational scholarship, like the work Mary Tripsas presented at the conference, goes largely unread in law schools. It's our loss.

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If you are planning to attend the Law & Society Association's Annual Meeting at the end of this month, you may be interested in our conference-within-a-conference on Law & Entrepreneurship. Here are the paper sessions:

 

Scheduled Time: Thu, May 27 - 10:15am - 12:00pm

Title: Law and Entrepreneurship: Corporate Finance 1211

 

Session Participants:

Chair: Gordon Smith (Brigham Young University) 

 

Law Firms and IPO Pricing

*Rob Beard (University of Illinois)

 

Choice of Organizational Form: Preliminary Data

*Brian Broughman (Indiana University)

 

Open Source and Financial Regulation: Technology to Improve Securities Disclosure and Financial Regulators

*Erik Gerding (University of New Mexico)

 

Law Entrepreneurs

*Larry E Ribstein (University of Illinois)

 

 

 

Scheduled Time: Thu, May 27 - 2:30pm - 4:15pm

Title: Law and Entrepreneurship: Intellectual Property 1411

 

Chair/Discussant: Darian M Ibrahim (University of Wisconsin, Madison)

 

Commercializing Data

*Shubha Ghosh (University of Wisconsin)

 

Governing Networked Production: Private Ordering in the Biopharmaceutical and Semiconductor Industries

*Matthew C Jennejohn (Delaware Court of Chancery)

 

Relationships, Technology Transfer, and the Limits of (Intellectual) Property

*Peter Lee (University of California, Davis)

 

An Empirical Study of Litigious Non-Practicing Entities

*Michael Risch (West Virginia University)

 

 

 

 

Scheduled Time: Fri, May 28 - 12:30pm - 2:15pm

Title: Law and Entrepreneurship: Venture Capital and Private Equity 2311

 

Session Participants:

Chair: Brian Broughman (Indiana University) 

 

What Killed the Venture Backed IPO?

*Robert Bartlett (University of California, Berkeley)

 

The Evolution and Renegotiation of Venture Capital Contracts

*Ola Bengtsson (University of Illinois)

 

Institutional Investment in Listed Private Equity

*Douglas Cumming (York University), Grant Fleming (Wilshire Associates), Sofia Johan (Tilburg University)

 

The New Exit in Venture Capital

*Darian M Ibrahim (University of Wisconsin, Madison)

 

Discussant: Gordon Smith (Brigham Young University) [email protected]

 

 

Scheduled Time: Fri, May 28 - 8:15am - 10:00am

Title: Law and Entrepreneurship: Social Values 2111

 

Chair: Karl S Okamoto (Drexel Univesity)

 

Entrepreneurship and Employee Ownership

*Matthew T. Bodie (Saint Louis University)

 

The Potential of Laws and Procedures Governing Business Entities in Facilitating Women's Entrepreneurial Development in the Horticulture Sector of Zimbabwe

*Rosalie K Katsande (University of Zimbabwe)

 

The Venn Diagram of Business Lawyering Judgments: Toward a Theory of Practical Metadisciplinarity (download)

*Jeffrey M. Lipshaw (Suffolk University)

 

Making Money While Making a Difference: Can Law Help Social Entrepreneurship Transform the World?

*Antony Page (Indiana University, Indianapolis), Robert Katz (Indiana University, Indianapolis)

 

The Release of Energy

*Gordon Smith (Brigham Young University)

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Two years ago, Darian Ibrahim and I were defending law and entrepreneurship as a credible field of study. Now we learn that Duke Law School and the University of Colorado School of Law are launching a new Law and Entrepreneurship LLM programs. We have come a long way since the First Law & Entrepreneurship Retreat. 

UPDATE: My friend and co-author Danny Sokol also comments on this development, though with much more panache:

In my own research in this area for an article in which I am writing with Gordon Smith (BYU Law), we note that lots of the existing literature in entrepreneurship is fundamentally about legal issues. Nevertheless, academics in other fields that have been active in entrepreneurship research (sociology/org theory, accounting, finance and economics) for the most part have yet to make these connections explicit in their work. 

As I explained to a colleague on Friday who wondered why the "law" part is so important if it has not been explicit in much of the non-legal research to date, my answer to him is that the "law" is like the Book of Esther. Unlike other books of the Bible, God (in all possible variations of the name) does not appear even once in the Book of Esther. However, as we learned in Hebrew School, this does not mean that God is not ever-present in the story.

Biblical allusions aside, law and entrepreneurship is a hot field and one that I think will continue to grow in part because the study of entrepreneurship has taken off in many universities. With BIGLAW jobs perhaps no longer guaranteed for students, law and entrepreneurship allows students to access an area of law where jobs might be possible for those who are willing to take on some risk. Additionally, increasingly the structure of BIGLAW might make a number of current BIGLAW associates and partners more willing to take the plunge into a fascinating area of law that is a driver of US innovation and growth.

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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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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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In writing my latest article, "The Windfall Myth," I coded the use of the word "windfall" in various contexts:  media, court cases, and congressional testimony.  This post will report the findings of my media research.  I used electronic databases that contained articles from the New York Times and the Wall Street Journal to read articles in which the word "windfall" was used between January 1, 2007 and July 1, 2007.  I then coded these uses to attempt to categorize the types of economic gains that were labeled as windfalls in these articles.  In alphabetical order, the following groups emerged:  Attorney Fees, Breach of Contract, Business Profits, Campaign Finance, Charitable Gifts, Criminal Evidence, Gambling, Government Budgets (Government Receipts and Government Payment), Illegal Kickbacks, Inheritances, Intellectual Property, Litigation, Oil & Gas (Foreign Oil & Gas and Domestic Oil & Gas), Real Property, Salaries and Bonuses, Securities (Investments and Entrepreneurship), Other (nonmonetary), and Unspecified.  Which were the big targets of windfall rhetoric?

(findings below the fold)

The paper splits out the NYT and the WSJ dataset, but for the sake of the blogging short form, I'll just include the combined dataset here.  The NYT had 117 instances in 110 documents (excluding proper names).  Eerily similar, The WSJ had 116 instances in 101 documents.  The combined dataset then had 233 instances.  Of those, 155 (2/3 or just over 66%) were what I term "marketplace gains":  Oil & Gas, Securities, Business Profits, Salary/Bonuses, Real Property, and Intellectual Property.  For purposes of the paper, I call these alleged Excess Earned Windfalls.  I was surprised that lawful, earned profits were being characterized as windfalls.  Historically, windfalls were profits brought to you by the vagaries of the winds, and in law, windfalls are measures of damages we try to avoid awarding because they will grant double recoveries or compensated nonexistent losses.  Here, these profits are earned, and even negotiated.  They generally do not even fall into the category of contract payments we frown upon because of mistake or an exogenous shock that renders the contract void. 

Category	Instances	Percentage
Oil & Gas	43	18.4549
Securities	38	16.3090
Business Profits	29	12.4464
Government Budgets	29	12.4464
Salary/Bonuses	24	10.3004
Real Property	15	6.4378
Other	14	6.0086
Litigation	9	3.8627
Intellectual Property	6	2.5751
Inheritance	4	1.7167
Breach of Contract	3	1.2876
Attorney Fees	3	1.2876
Charitable Gifts	2	0.8584
Criminal Evidence	2	0.8584
Gambling	2	0.8584
Unspecified	2	0.8584
Campaign Finance	1	0.4292
Illegal Kickbacks	1	0.4292

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I am sitting in a classroom at Drexel University's Earle Mack School of Law, participating in the Third Law & Entrepreneurship Retreat. Christine, Usha, and a slew of former Glom guest bloggers -- including our host, Karl Okamoto -- are in attendance.

The goals of the Retreat are to encourage the development of scholarship at the intersection of law and entrepreneurship and to build the community of people who identify themselves as interested in such scholarship. In the First Law & Entrepreneurship Retreat, we spent a lot of time talking about the question, "What is Entrepreneurship?" Although that question still hovers over our gathering, most of us have come to terms with the field and are now going about the business of producing scholarship.

The projects being discussed here are mostly at a very early stage of development, which is exactly the way we want it. Our gathering is intentionally small (only 14 people this year), and our discussions are highly interactive. To give you a sense of the subject matter, here is the lineup of papers:

Brian Broughman, Do VCs Misbehave? Some Evidence from Silicon Valley (presented by Bobby Bartlett)

Christine Hurt, The Windfall Myth (presented by Kim Krawiec)

Darian Ibrahim, Building the Next Silicon Valley: The Role of Angel Investors in Economic Development (presented by Roger Dennis)

Florencia Marotta Wurgler, Who Reads Fine Print on the Web? A Test of the "Informed Minority" Hypothesis (presented by Ronald Mann)

Karl Okamoto, After the Bailout: Regulating Systemic Moral Hazard (presented by Bob Lawless)

Usha Rodrigues, Towards a Theory of the Expressive Value of the Nonprofit Form (presented by Diane Burton)

D. Gordon Smith & D. Daniel Sokol, Law & Entrepreneurship: A Literature Review (presented by Danny Sokol)

This is one of my favorite events of the academic year because it's one of those rare venues where all of the participants are engaged.

 

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It's so nice to have a chance to guest blog over here with many of my friends.  For the next two weeks, I don't have to nudge (or noodge) Gordon and David Zaring when I've posted something resembling corporate or finance at Legal Profession Blog.  Thanks, Gordon!  I thought I'd start off by bringing over here something (slightly edited) that I wrote yesterday morning.

At the end of the week, I am going to participate in the Entrepreneurship in a Global Economy symposium at Western New England College's Law and Business Center for Advancing Entrepreneurship. I will be discussing my somewhat contrarian and deliberately provocative essay Why the Law of Entrepreneurship Barely Matters.  Since the piece was inspired by Gordon's article (with Masako Ueda), Law & Entrepreneurship:  Do Courts Matter?, this seems like a good place and time to explain how my general thesis on lawyers, business, contracts, and entrepreneurship connects up with the present financial crisis.

A while back I wrote a lumbering piece with a point that seems to me more apparent now than it did when I published it in 2005:  the law (I was focusing on contract law) is not a particularly good tool for addressing radical uncertainty.  When it comes time to make difficult predictions about a highly contingent future, the process of judgment is so complex that it overwhelms the law's linguistic model. Imagine writing a contract that depends on the twentieth move of a game of chess that has yet to begin.  In theory, it's possible, but in practice, we still don't know if it's merely impractical or impossible.  And chess is simple compared to life.

I have joked over and over again (I apologize for it) that I like to work at the intersection of Kantian philosophy and venture capital, and Thomas Friedman's column in yesterday's New York Times brought me back to the thesis.  He quotes a friend to the effect that nature is just chemistry, biology, and physics, and you can't spin it, bribe it, or sweet talk it.  In Kantian terms, that is the heteronomous world in which we live, of physical cause-and-effect of which we must necessarily be a part.  Friedman's point is the same one I tried to make in a late footnote to the lumbering piece:  markets are very much the same as nature.  "At their core markets are propelled by fear and greed.  They're just the balance at any given moment of those two impulses." 

I believe that as well.  There's little that is moral about markets, just as there is little that is moral about physics.  Nor do we really, after all is said and done, want to eliminate fear and greed.  It's what sustains our bodies, and Kant was enough of an empiricist, I think, to conclude that if there was a soul, the only way you could know anything about it was because it was housed in a body.  Or to put it in terms of Jewish lore:  we have a "bad" impulse, the yetzer hara, by which we lust and amass, and a good impulse, the yetzer tov, by which we love and contribute, and we can't live (or live well) without either of them.  The Aristotelians looking for a golden mean should like this as well.  In present terms, it leaves me equally repulsed by unrepentant free market apologists and by blame-seeking moralists.  (The need to "blame" somebody for the current crisis is an interesting exercise in teleology as well, but that is for another time.  Suffice it to say that innocent people losing savings in market crashes is as almost as troubling as innocent people dying in airplane crashes, and reconciling either one is a tough philosophical issue.)

What does this have to do with entrepreneurship?  Again, to quote Friedman on the coming global workout of this credit bubble:  "The workout promises to be painful, complicated, and protracted.  Government will have to do its part.  But it must regulate the excesses without smothering the underlying innovative, entrepreneurial and risk-taking attributes of our economy, which are what will ultimately bail us out - as they always have."

So my project as a business person and lawyer of some worldly experience, and as a teacher of lawyers, has been a tad contrarian: suggesting to business lawyers that they ought to approach their task with some amount of modesty about their role in dealing with radical uncertainty.  (It's hard to get a feel for what I mean if all you do is read cases, or even litigate cases.  That is merely structured second-guessing.)  The lawyer's role not trivial, but it's not the be-all that law and economics would suggest by the notion of an "incomplete contract" (think back to my chess example) as though the idea of a complete contract does any helpful intellectual work at all.  And that's just law!  Ethics is another ball of wax.  Unless the proposal is that we go back to pre-Industrial Revolution agrarian society, somebody has to make our iPods and laptops and hybrid cars and get all that stuff to Whole Foods, and industry, even when it's done well and responsibly, is a dirty business that calls on us to make tough choices.

What I really love about the juxtaposition of lawyers and entrepreneurs is this jarring contrast in the approach to uncertainty. At the behest of my son, I've been wading through Gore Vidal's dense historical novel, Burr.  Burr was a practicing lawyer to the end of his life, and, in the novel, the young clerk in his office who narrates the story wants to know if he should take the bar exam.  Burr says he should because he will certainly pass.  The narrator replies, "But I don't want to be a lawyer."  Burr responds, "Well, who does?  I mean what man of spirit?  The law kills the lively mind.  It stifles originality.  But it is a stepping-stone. . . ."  Why does the micro-law of entrepreneurship barely matter?  Because it can barely contain the wide-ranging orientation to change and innovation in the face of uncertainty that is the mark of an entrepreneur.  Effective lawyers to entrepreneurs, like effective lawyers to business people, and like effective ethicists dealing with the workings of amoral markets, have to be able to walk and chew gum.

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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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