Venture capital (VC) firms do not typically think of themselves as active litigators. The industry’s culture emphasizes risk tolerance, investment patience, and relationship-building over courtroom enforcement.
But a recent paper by University of San Francisco professors Abe Cable and Emily Strauss, Venture Capital Litigation in the Unicorn Era,1 suggests that VCs may face more litigation risk than many market participants assume, particularly in today’s “unicorn era,” where startups raise unprecedented amounts of private capital and delay the traditional IPO or M&A exit.
Studying litigation involving hundreds of venture firms active between 2014-2025, the authors found that approximately 25% of active VC funds were involved in at least one lawsuit during that period, either as plaintiffs or defendants. While still below litigation rates for public companies, that level of exposure is significant, particularly given that many of the cases involve sophisticated claims and expensive litigation in Delaware and federal courts.2
I came across their paper while advising a VC client about the advisability of bringing a claim against a former portfolio company after it had gone public in a de-SPAC transaction. We ultimately concluded that litigation was not worthwhile, but the question prompted a broader one: how common is venture litigation outside of employment disputes and other matters unrelated to the fund’s core business?
Cable and Strauss offer one of the first data-driven answers.
VCs Are More Often Defendants Than Plaintiffs
The data confirms that VC firms do not often initiate litigation, as they are plaintiffs in only about 20% of cases.
This makes sense for several reasons. First, as early-stage investors, VC firms typically hold preferred or convertible securities, maintain board representation or observer rights, and negotiate contractual protections such as rights of first refusal, information rights, drag along/tag along rights, and voting rights. These governance-related protections place VCs closer to oversight and control than to the position of a passive shareholder plaintiff.
There are also important business considerations. Venture investing inherently assumes a high failure rate. Bringing litigation after a disappointing outcome could be perceived as a “sour grapes” response to what was always understood to be a speculative investment. Litigation can also affect relationships with entrepreneurs, future co-investors, investment banks, and other market participants who may be reluctant to work with an investor perceived as litigious.
However, VCs are sued with surprising frequency. One reason is the same governance involvement that gives VCs influence over portfolio companies. Board representation, governance rights, and operational involvement can potentially create actual or perceived control, making VCs attractive defendants when things go wrong.
More importantly, venture firms are often the only solvent party remaining after a startup fails. When a portfolio company becomes insolvent or judgement-proof, investors may become litigation targets simply because they have the resources to satisfy judgments or settlements.
Courts Are Pushing Back
The authors also note that both federal and Delaware courts have become increasingly reluctant to expand liability for venture investors under theories such as federal “control person” liability and Delaware aiding-and-abetting fiduciary duty claims.
The paper generally views these developments favorably, arguing that imposing expansive liability on VCs could fundamentally alter venture capital’s risk-tolerant business model. Venture investing depends upon financing highly speculative businesses, and the authors suggest that overly broad liability theories could discourage the very risk-taking that defines the sector.
What This Means for Venture Investors
A key takeaway from the paper is that when a VC plays an active operational or governance role in a portfolio company, it increases the likelihood of being named as a defendant in a lawsuit when things go wrong – particularly if the company later becomes insolvent and plaintiffs are looking for a solvent target.
That does not mean venture firms must avoid active engagement. Rather, it is a reason to carefully consider the distinction between investor oversight, strategic guidance, and operational control. The closer a VC moves toward day-to-day operational involvement, the more difficult it may become to argue that the firm acted solely in its capacity as an investor rather than as a controlling participant in management decisions.
Additionally, as startups remain private longer and complete multiple financing rounds with increasingly complicated cap tables, the potential for conflicting interests between founders, common holders, early-preferred investors, and late-stage preferred investors becomes more pronounced.
From a practical perspective, VCs and startup boards may wish to consider the following:
- Board process and documentation
Board process, documentation, and conflict management – both by VC firms and their portfolio companies – can take on increased significance if decisions are later scrutinized in litigation. Formal procedures that may seem unnecessary during periods of rapid growth can become extremely important in hindsight. This requires maintaining clear meeting minutes, documenting the rationale for major decisions, identifying potential conflicts of interest, and obtaining independent approvals where appropriate.
- Operational involvement
Many venture investors pride themselves on being “hands on.” But informal operational involvement – particularly communications directing management decisions, financing strategy, layoffs, disclosures, or customer issues – may later be cited in support of allegations regarding control and operational involvement. VC emails, texts, Slack messages, and investor updates are subject to discovery and may eventually appear in litigation.
- Independent directors
Ensuring that portfolio company boards include genuinely independent directors is an important governance safeguard. As capitalization tables become more complicated and the economic interests of founders, common stockholders, and successive rounds of preferred investors diverge, independent directors can provide valuable procedural protections where actual or perceived conflicts exist. Their presence can help strengthen the integrity of the board’s decision-making process and reduce litigation risk, particularly in connection with insider financings, conflicted M&A transactions, restructurings, recapitalizations, and distressed liquidity events.
- Distressed Financings
Many fiduciary-duty and aiding-and-abetting claims arise not during successful periods, but during distressed financings and liquidity crises. Transactions that may appear economically rational to investors can later be characterized by plaintiffs as coercive, self-interested, or unfair to junior stakeholders.
Process and documentation may take on additional significance in these situations. Minutes, consent materials, and deal records that reflect why the transaction was necessary or beneficial to the company, rather than solely advantageous to the investors, can play an important role if decisions are later scrutinized. In down rounds and recapitalizations, anti-dilution provisions, class votes, protective provisions, and investor participation rights may warrant particular attention. Similarly, bridge financings often invite scrutiny of pricing, conversion terms, warrants, maturity, default remedies, and seniority, and the rationale supporting those terms.
- D&O Insurance and Indemnification
Considering the litigation risk they face, VCs may wish to evaluate portfolio company D&O coverage, indemnification provisions, advancement rights, and whether fund personnel serving on boards are adequately protected.
Key Takeaway
As startups stay private longer, raise larger amounts of capital, and adopt increasingly complex governance structures, litigation risk appears to be evolving into a structural feature of the venture ecosystem rather than an exceptional event.
Strauss and Cable’s paper provides valuable empirical context for understanding that shift and supports viewing litigation risk not as an outlier, but as a factor to be considered alongside governance, financing, and oversight decisions.
Mike Sloan is a Partner at Outside General Counsel LLP and focuses his practice on advising venture capital funds, private investment firms, and emerging companies on fund formation, governance, portfolio company management, financings, asset dispositions, regulatory matters, and the full range of operational issues that arise throughout the venture capital lifecycle. Before joining OGC in 2026, Mike served as General Counsel to an international venture capital firm and previously practiced at several AmLaw 100 law firms.
- The full article is available for download at the SSRN website here. A blog post summarizing the article can be found here.
- The authors appropriately present their findings as descriptive only. They identified 287 lawsuits involving 628 VC firms during the study period, which raises the question whether that level of litigation should be viewed as significant or comparatively modest. The authors note that VC litigation rates remain below those of public companies but avoid judgments about whether venture capital firms are sued too often or too rarely.