Where Startup Governance Gets Real, and Musk v. OpenAI Enters the Courtroom
Boardroom Governance Newsletter #76 | May 5, 2026
For much of a startup’s life, governance can feel like a background issue.
When the company is growing, founders, employees, investors, and board members are generally rowing in the same direction. Everyone is focused on product, customers, hiring, fundraising, and reaching the next milestone.
But moments of stress are different.
A sale, IPO, direct listing, de-SPAC transaction, distressed M&A process, acqui-hire, wind-down, down round, or recapitalization can expose the fault lines embedded in the company’s capital structure. Those fault lines are especially important in venture-backed companies, where different stockholders often hold very different economic rights.
That is the central point of a forthcoming article by Amy Simmerman of Wilson Sonsini and Vice Chancellor Lori Will of the Delaware Court of Chancery, titled Navigating the Exit: Fiduciary Duties in Private Company Liquidity Events. The article offers a practical and timely reminder for directors of private companies: when liquidity approaches, process matters, conflicts matter, and the board’s fiduciary duties do not disappear simply because investors negotiated contractual rights.
The authors begin with the familiar architecture of venture-backed governance. Startups often have multiple series of preferred stock, liquidation preferences, investor consent rights, board designation rights, and other carefully negotiated protections. These rights are real and enforceable. But under Delaware law, they remain contractual rights. They do not redefine the board’s fiduciary duties.
That distinction becomes critical when the interests of preferred and common stockholders diverge.
Down rounds and recapitalizations can create many of the same governance pressures as exits, and sometimes even more acute ones, even though the authors focus only on exit transactions. In a difficult financing environment, the board may have to decide whether to approve a new round that reprices the company, adds senior liquidation preferences, dilutes existing holders, or forces common stockholders, employees, and earlier investors into a materially worse position. These transactions may be necessary to keep the company alive. But they are also moments when outcomes can diverge sharply between preferred and common stockholders.
That divergence is not limited to the final sale of the company. A recap can reset the economic bargain long before exit. New money may receive senior rights. Existing preferred holders may participate on favorable terms. Common stockholders may be heavily diluted or effectively pushed further out of the money. Founders and employees may receive new incentive grants, while legacy common equity loses much of its practical value. In those settings, the board’s process matters: who negotiated the terms, who benefited from them, whether alternatives were considered, and whether independent or disinterested directors played a meaningful role.
In many successful companies, there may be no practical conflict. If the exit value is high enough to clear the preferred stock liquidation preferences and generate meaningful value for the common, everyone wins. But if the sale price is not enough to satisfy all preferences, or if the company is facing a down round, distressed sale, recapitalization, or shutdown, the picture changes dramatically.
At that point, venture-backed boards can face the dual fiduciary problem. VC-appointed directors owe duties to the company on whose board they serve, while also having responsibilities to the funds that appointed them. Those funds may benefit from a transaction that returns some or all of their liquidation preference, even if common stockholders receive little or nothing.
Delaware courts have seen this movie before.
In Trados, the Court of Chancery scrutinized a sale where preferred stockholders and management received the proceeds while common stockholders received nothing. The court ultimately found that the common stock had no economic value at the time, but the process was heavily criticized. In Nine Systems, the court again focused on process failures, including inadequate valuation work, exclusion of an independent director, and insufficient disclosure of conflicts.
I wrote about the Trados case in this 2019 post, and again on the 10th anniversary of the decision, when we hosted a conversation with Vice Chancellor Travis Laster of the Delaware Court of Chancery, who authored the opinion. The full video is below.
The lesson is not that directors can never approve a transaction where common stockholders receive little or nothing. Sometimes the common may in fact be out of the money. The lesson is that directors need to understand whose interests fiduciary duties protect, identify conflicts clearly, and build a record showing that the board considered alternatives, valuation, and the impact of the transaction on the company and its residual claimants.
That is especially important because startup valuations can be misleading. The headline valuation from the last financing round may not reflect the value of the common stock once liquidation preferences and other preferred rights are taken into account. A company can sell for what looks like a significant price and still leave common stockholders with nothing. Conversely, a sale below the last private valuation can still create value for the common if preferences are exceeded.
The article also extends the analysis beyond traditional M&A. Direct listings, de-SPAC mergers, and distressed exits each bring their own governance issues:
In direct listings, insider liquidity is part of the design, but boards still need to be attentive to insider trading and disclosure risks.
In de-SPAC transactions, much of the fiduciary risk may sit on the SPAC side, particularly where sponsors are incentivized to complete any deal rather than liquidate.
In distress, boards must navigate the messy reality that venture-backed startups often do not go through formal bankruptcy. They may pursue acqui-hires, assignments for the benefit of creditors, distressed sales, or managed wind-downs instead. I wrote about this phenomenon in 2023, particularly highlighting Elizabeth Pollman’s excellent article Startup Failure.1
For directors, the practical takeaway is straightforward: the exit is not the only moment when startup governance gets real. Down rounds, recapitalizations, distressed financings, liquidity events, and wind-downs are not just financial events. They are governance events.
The authors offer what is essentially a modern playbook for private company boards. Directors should assess independence and conflicts on a director-by-director and transaction-by-transaction basis. Where appropriate, boards should consider special committees or disinterested stockholder approval. They should understand the company’s capital structure, document valuation and alternatives, negotiate with the common stockholders’ interests in mind, scrutinize management carve-out or incentive plans, and ensure candor in communications with stockholders.
This may sound like basic governance blocking and tackling. But in the private company context, it is often where the hardest questions arise.
Who is the board really negotiating for?
Is the sale being driven by the best interests of the company, or by the liquidation preferences of one class of investors?
Is the common truly out of the money, or has the board simply accepted that conclusion without meaningful analysis?
Are independent directors actually participating, or are they being sidelined?
Are stockholders getting the full picture?
These questions are not academic. As companies stay private longer, raise more capital, build more complex capital structures, and navigate a more uncertain financing and exit environment, boards will face more moments where governance becomes visible: down rounds, recapitalizations, distressed financings, liquidity events, and exits.
As I noted in my last newsletter, the average valuation of companies on the Setter 30, a quarterly ranking of the thirty most sought-after venture-backed companies in the secondary market, reached $120 billion, up 122% year over year and nearly matching the average S&P 500 company. That is a remarkable data point. The private markets are no longer a footnote to public markets. They are increasingly where some of the most important questions of value creation, investor liquidity, employee equity, and board accountability are playing out.
For boards of venture-backed companies, the moment of exit is often when governance becomes most visible. But it is not the only such moment. Down rounds, recapitalizations, distressed financings, and restructurings can raise the same core questions: whose interests are being protected, how conflicts are being managed, whether the common is truly out of the money, and whether the board has built a record of informed, disinterested decision-making.
The best time to prepare for those moments is before the company is already under pressure.
Behind Closed Doors: Do Private Firms Have a Governance Problem? I will be speaking this Friday, May 8, 2026, at the Rotman School of Management at the University of Toronto. If you’re in Toronto or already planning to be there, I’d be delighted to see you. You can sign up here.
Boardroom Governance Podcast 🎙️
My latest episodes are listed below. I’m also excited to share more soon about the inaugural Boardroom Governance Summit, a small, curated convening of board members and governance leaders taking place August 26–27, 2026, at Limerick Lane Cellars in Healdsburg, California.
E207 Eddie Ramos: How AI Is Reshaping Investing and Boardrooms. Eddie discusses how AI, private markets, and geopolitics are reshaping investing and corporate governance. The conversation explores tokenization, audit committee oversight of AI, and why boards remain under prepared for the pace of technological change.
E206 Steven Lipin: Activism, M&A, and the Rising Stakes of Board Communication. Steve Lipin, the founder and CEO of Gladstone Place Partners, discusses how corporate governance has evolved through the lens of communications, investor relations, and crisis management. The conversation explores shareholder activism, M&A dynamics, and the growing impact of cybersecurity and AI on boardroom decision-making.
You can listen to all the Boardroom Governance Podcast episodes in your favorite apps including Apple and Spotify.
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If you or your organization is interested in sponsoring the podcast, I would love to hear from you.
The podcast is sponsored by The American College of Governance Counsel.
Other Relevant Corporate Governance News and Content
Inside the Courtroom Battle Between Elon Musk and OpenAI. The high-stakes federal trial is underway in Oakland over whether OpenAI’s leadership betrayed the organization’s original nonprofit mission as it moved toward a for-profit structure and deepened its partnership with Microsoft. Musk frames the case as a governance failure and a broken founding promise. OpenAI is expected to argue that its structure still protects its charitable mission and that raising large amounts of capital was necessary to compete in frontier AI. Here is a good summary of the arguments presented by both parties in their opening statements.
Witnesses Who Have Testified
Elon Musk: Testified for three days during the first week of trial. He accused OpenAI’s leadership of betraying the company’s nonprofit mission and misleading him about its eventual shift toward a for-profit structure.
“It is not ok to steal a charity. It will give license to looting every charity in America. The consequences of this case go far beyond me or everyone here. The entire foundation of charitable giving in america will be destroyed.” Elon Musk, April 28, 2026
Jared Birchall: Musk’s family office manager testified about Musk’s financial contributions to OpenAI, as well as Musk’s failed $97 billion bid to acquire the company in early 2025.
Stuart Russell: The UC Berkeley professor and AI expert testified about AGI safety concerns, including the risks of an “AGI arms race.”
Greg Brockman: OpenAI’s president and co-defendant began his testimony on May 4. He defended his equity stake in the company (currently valued at $30bn) and argued that the OpenAI Foundation remains a well-resourced charitable entity. His testimony also comes against the backdrop of a reported pretrial text exchange in which Musk asked whether Brockman was interested in settling the case. When Brockman suggested that both sides drop their claims, Musk reportedly warned that Brockman and Altman would soon become “the most hated men in America.”
Expected Upcoming Witnesses
Satya Nadella: Expected to address Microsoft’s multibillion-dollar investment in OpenAI and the strategic relationship between the two companies.
Shivon Zilis: Former OpenAI board member and current executive at Neuralink, Zilis is expected to testify about early founder communications. Her testimony may receive particular attention because of her close personal and professional relationship with Musk. Zilis has worked in senior roles across Musk companies, including Tesla and Neuralink, and she and Musk have four children together.
Ilya Sutskever: OpenAI co-founder and former chief scientist expected to testify about OpenAI’s founding goals, its nonprofit mission, and the company’s evolution over time. His testimony may be especially important because of his role as a board member during the November 2023 leadership crisis, when the board ousted Sam Altman before Altman was reinstated days later. I wrote about that episode in 2023. He is now leading Safe Superintelligence Inc. (SSI), the AI startup he co-founded after leaving OpenAI, which was most recently reported to be valued at about $32 billion.
Mira Murati: Former OpenAI CTO expected to testify about Microsoft’s role during the November 2023 firing and reinstatement of Sam Altman. Her testimony may be important because she was briefly installed as OpenAI’s interim CEO after the board removed Altman. Murati has since left OpenAI and is now founder and CEO of Thinking Machines Lab, an AI startup that raised a $2 billion seed round in 2025 at a reported $12 billion post-money valuation.2
Sam Altman: Expected to testify about OpenAI’s shift toward a for-profit structure and the decisions behind that transition.
OpenAI Wants to Go Public. First Sarah Friar Needs to Get It to Grow Up. The CFO is managing both Sam Altman and OpenAI’s ambitions for what could become one of the largest IPOs ever. Banks have reportedly told Anthropic and OpenAI that whichever company reaches the public markets first may define the category. If Anthropic pulls off a mega-IPO first, it could take momentum away from OpenAI, since large pools of capital are eager to back the next major AI company, and the first mover may get the first shot.
Why Almost Everyone Loses—Except a Few Sharks—on Prediction Markets. “A WSJ analysis shows a small number of accounts on Polymarket and Kalshi—often pros using data-driven algorithmic trading—take home most of the winnings”
Morgan Stanley’s capex forecast for the 5 hyperscalers: For next year, the AI capex forecast has reportedly been raised from $951 billion to $1.1 trillion. To put that in perspective, 2026 spending alone could roughly match what all non-tech companies in the S&P 500 spent combined in 2025. According to David Sacks, “I’ve been saying for a while that AI capex will be a 2% tailwind to GDP growth this year. In fact, according to a new report from Morgan Stanley, the numbers are even stronger, more like 2.5% this year and over 3% next year.”
Holger Zschaepitz@SchuldensuehnerMorgan Stanley has again raised its capex forecasts for the five hyperscalers Amazon, Alphabet, Meta, Microsoft, and Oracle. It now expects them to spend about $805bn this year, up from a previous estimate of $765bn. For next year, the forecast has been lifted from $951bn to
4:33 PM · May 3, 2026 · 741K Views101 Replies · 373 Reposts · 1.51K Likes
SpaceX Ties Elon Musk’s Pay To Mars Colony, Space Data Centers: SpaceX’s reported compensation structure would give Elon Musk 200 million super-voting shares with 10:1 voting power if the company reaches a $7.5 trillion valuation and establishes a permanent Mars colony of at least 1 million people. Musk could receive another 60.4 million voting shares if SpaceX hits a separate valuation target and begins operating orbital data centers capable of generating at least 100 terawatts of compute capacity. The governance backdrop is equally important. Musk reportedly increased his SpaceX stake last year by buying $1.4 billion of stock from current and former employees, strengthening his influence ahead of a potential IPO. The company also appears focused on limiting litigation risk, including through mandatory arbitration provisions that may restrict shareholders’ ability to bring certain legal claims.
The Kobeissi Letter@KobeissiLetterThis is incredible: Elon Musk will receive 200 million super-voting shares in SpaceX ONLY IF the company establishes a permanent Mars colony with at least 1 million people. In other words, Elon Musk will only receive this pay package if 1 million people live on Mars. In other
5:23 PM · Apr 29, 2026 · 828K Views735 Replies · 584 Reposts · 6.71K LikesSpaceX Strikes Deal With Cursor for $60 Billion.
“SpaceXAI and Cursor are now working closely together to create the world’s best coding and knowledge work AI. The combination of Cursor’s leading product and distribution to expert software engineers with SpaceX’s million H100 equivalent Colossus training supercomputer will allow us to build the world’s most useful models. Cursor has also given SpaceX the right to acquire Cursor later this year for $60 billion or pay $10 billion for our work together.” SpaceX announcement. April 21, 2026.3
This is quite a power law chart, from a16z:
YC clarifies how portfolio companies should define revenue. From Garry Tan, President & CEO of YC: “Here's YC’s official advice about being truthful and precise about what is pilot, bookings, revenue and recurring revenue. Founders, particularly first time founders, need to sear this into their brains. Don't mistake one tier for another. Be precise, and always be truthful”:
AI powering Taiwan. Taiwan’s stock market has reportedly reached a total market capitalization of $4.14 trillion, surpassing the U.K.’s $4.09 trillion for the first time. Taiwan’s market cap has tripled since 2020, driven largely by the AI-fueled surge in semiconductor stocks.
The Kobeissi Letter@KobeissiLetterTaiwan's stock market just made history: The total market cap of Taiwan's stock market is up to $4.14 trillion, surpassing the UK's $4.09 trillion for the first time. Taiwan's market cap has TRIPLED since 2020, driven almost entirely by the AI-fueled surge in semiconductor
2:00 AM · Apr 23, 2026 · 312K Views134 Replies · 521 Reposts · 2.93K Likes
Tim Cook Will Step Down as Apple C.E.O. Tim Cook is stepping down as Apple’s chief executive and will be replaced by John Ternus, the head of hardware engineering.
The Father-Daughter Showdown That Shook an $18 Trillion Investing Empire. Quite the governance story about Fidelity. “Today, Fidelity oversees some $18 trillion in assets, earns more annually than BlackRock and helps manage the life savings of one of every five U.S. adults. Half of those customers signed up in the past five years.”
A Family Feud at an Oregon Winery Turns to Vinegar Over A.I. Slop. Great story involving a family business dispute, and grotesque misuse of AI by attorney. “An online database tracking judges’ reprimands of A.I. misuse [hallucinations] now catalogs 1,394 cases, almost triple the number from only five months ago.” “Damien Charlotin, a French lawyer who runs the A.I. legal misuse database, said he believed the monetary penalty in the case ($100k) was the largest on record.”
Onward and upward.
Sincerely,
Evan Epstein
Worth highlighting these sections from her paper again:“The modus operandi of Silicon Valley’s approach to startup failures [is to] normalize and redeploy. Venture capital firms do not generally sweat an individual failure—that is part of their business model.” “Several developments are shifting the landscape of venture capital investing and suggest that the system may come under pressure to deal with the size, type, or number of failures. New entrants to venture-backed startup investing, longer timelines of staying private, higher valuations and amounts raised, and looming increased antitrust scrutiny of technology acquisitions all point to change that might test the adaptability of the existing law and culture of startup failure that aims to normalize and redeploy at low social and financial cost.”
I’ve written before about her strong governance control, including a board vote equal to all other directors’ votes combined, plus one. She also reportedly benefits from supervoting shares with 100:1 voting power and proxy voting agreements from co-founders. The company is organized as a public benefit corporation and has also faced its own “messy drama”, with some co-founders reportedly departing and returning to OpenAI.
Largest VC-backed acquisition of all time? The top three appear to be: SpaceX/xAI’s pending $60 billion acquisition of Cursor; Google’s $32 billion acquisition of Wiz; and Facebook’s $22 billion acquisition of WhatsApp.
Solid piece.
The board duty question only gets sharp when the cap table forces it. The difference between common and preferred is treated as a finance problem in too many rooms, when the right framing was always fiduciary. Independent directors get sidelined the moment liquidation preferences enter the conversation, and most of them never push back hard enough. Delaware sees this. The investors who structured the preference rarely do.