A Fresh Look at VC Litigation: Complicating the Conventional Wisdom

In venture-capital (‘VC’) scholarship, there is a conventional wisdom that litigation is rare in Silicon Valley. Whether due to legal impediments, litigation dynamics, or norms, we expect that participants in the startup ecosystem brush off failure and disputes rather than pressing their cases in court. In Venture Capital Litigation in the Unicorn Era, we look at VC litigation with a wide lens, and the exercise complicates the conventional wisdom.

Through docket searches, we compiled an original dataset of lawsuits by and against VC firms that were active in the period from 2014-2025 (the ‘unicorn era’). We find that nearly 25% of the VCs we investigate were involved in litigation of some kind. Is that a lot or a little?   

From one perspective, that number is compatible with conventional wisdom. It is far-below the rates of litigation observed in studies of public companies, even though those studies typically count only shareholder litigation while we include a wide range of claim types (securities fraud, fiduciary duties, breach of contracts, business torts, employment law, and a wide range of ‘other’ claims). If the comparator is that frothiest of litigation environments, then VCs are relatively unscathed by litigation. 

On the other hand, we believe the lawsuits we observe do represent meaningful litigation risk. Many of the claims require hiring AmLaw 100 defense firms or Delaware boutiques and likely have other negative consequences for the VCs involved. And we capture only a part of a VC’s litigation risk. Our methodology focuses on cases brought directly against the VC (fund or management company) and does not capture litigation brought only against portfolio companies or VC-affiliated directors. According to the trade press, the insurance markets are starting to take notice of plaintiffs’ propensity to add VCs as plaintiffs in a wide variety of suits. 

Beyond total lawsuit count and cost, we think there are valuable insights to be gained from parsing the annual trends and shifting claim composition.  The unicorn era featured well-chronicled developments that might be expected to show up as spikes or dips in total lawsuits at various points in the study period. In the past decade, the IPO window opened and closed, Delaware courts increasingly scrutinized conflicts, and notable unicorns had spectacular governance meltdowns. The overall trend in our dataset, however, was a gradual increase in number of lawsuits that more or less tracked overall levels of VC investing. When litigation did respond to market developments (SPACs) or legal interventions (a period of broad aiding and abetting liability in Delaware and a period of tightened control person liability in the Second Circuit), the litigation seemed to just migrate between claim types. Most interestingly, a collection of legal theories we call business torts (common law fraud, unjust enrichment, conversion, and tortious interference) were sometimes countercyclical to more familiar legal theories such as federal securities law claims and Delaware fiduciary duty claims. 

This hydraulic effect—steady litigation rates with claims migrating between favored and disfavored theories—might remind some readers of the pattern in public-company merger litigation, where interventions to discourage some lawsuits only push litigation to the next-best theory. The pattern raises the possibility that relentless litigation pressure seeks out deep pockets regardless of ultimate legal merit or culpability. This is of course an old concern in the public-company context. But it is not how we ordinarily think of startups, even though VCs are very much the deep pockets when a startup fails. 

We think this broadened perspective on VC litigation has important policy implications. Expert business courts (Delaware and the Second Circuit) are relatively restrictive in articulating the legal theories most frequently used in our study to sweep VCs into lawsuits. The Second Circuit requires culpable participation for Section 20 control-person liability under the Exchange Act, while other federal circuits are more permissive. Delaware, while briefly opening the door to aiding and abetting breach of fiduciary duty claims under the Chancery Court’s Mindbody decision, ultimately course corrected at the end of the study period. 

We think this restrictive approach gets it right. More permissive approaches to secondary liability and related theories can begin to resemble the kind of strict liability reserved for classic gatekeepers like auditors and underwriters. But VCs, investing under a power law theory that seeks especially high-risk, high-reward business plans, seem ill-suited to this kind of monitoring role. It is hard to imagine VC existing in anything like its current form if the law-imposed gatekeeper-like responsibilities on VCs. 

While this is a mostly positive assessment of the status quo, it does come with a significant caveat. The legal architecture of private company litigation is different than public company litigation. In the public context, many class action lawsuits must be brought in federal court under federal securities law theories. There is no similar channeling function for private company litigation, resulting in a fragmented system that is hard for any court to police. Private ordering, such as forum selection bylaws, can help. But they are an incomplete solution in a litigation environment where plaintiffs have an especially wide variety of available legal theories and accompanying procedural environments.

The authors’ article, ‘Venture Capital Litigation in The Unicorn Era’, can be found here.

Abe Cable is a Professor of Law at UC Law San Franscisco. 

Emily Strauss is an Associate Professor of Law at the UC Law San Francisco.