Flies and Horses: Thoughts on the Law of Entrepreneurship

My friends Gordon Smith and Darian Ibrahim have posted an interesting short paper on whether there is a “law of entrepreneurship” (“Entrepreneurs on Horseback: Reflections on the Organization of Law“). The first half pokes some fun at the stodgy view that there is nothing (and never will be anything) new under the sun – hence, there is no Law of the Horse, Law of Cyberspace, Law of Entrepreneurship. (For a detailed tracing of the Law of the Horse allusion from Llewellyn to Wellington to Easterbrook to Lessig, see the first few footnotes of the article.)

I can’t deny that there is some unique law to entrepreneurship (the most prominent being the effect of the so-called “down round” which invokes the anti-dilution clause of the venture capital agreement, on which Gordon has written a perspicacious article), as well as a host of legal skills and disciplines (many of which Gordon and Darian ably summarize) that need to be in the “toolbox” of any lawyer who hopes to do work for entrepreneurs and startup companies .

Not to beat a dead horse, but if horse is the image du jour, then I can’t help thinking of lawyers and law, at least in the traditional way of thinking about lawyers and the law, as flies buzzing around (and trying to keep up with) the galloping steed. Gordon and Darian are absolutely right to highlight the necessarily interdisciplinary nature of the study of entrepreneurship, but I keep thinking that focusing on the legal is the fly’s-eye view – one that is not invalid or wrong, but pretty much of primary interest to the fly. (I’ve read Ronald Gilson’s iconic piece on Value Creation by Lawyers, and I’m still not fully persuaded on the “transaction cost engineer” model, at least from the examples Gilson gives in a sophisticated M&A agreement. The one place I do think lawyers serve a cost-reducing function is in the transmission of information about what is “market” in VC term sheet boilerplate. But that’s informed intuition, on my part, not rigorous data. And, as Gilson points out, there’s no reason particularly why lawyers as opposed to VCs have to be the repositories of that information.)

Does the horse even notice the fly? Well, I’ll let you ponder that while I change horses in the middle of this stream of consciousness, and continue below the fold about some really interesting work outside the legal academy on the subject.


I saw an ad Tuesday morning in the Wall Street Journal for the Darden School of Business at Virginia. The ad features a little essay from Professor Saras D. Sarasvathy asking why there seems to be a view that investments in the eradication of human misery ought not to be made with the expectation of a positive return. It was particularly interesting to me because I’ve had some discussion on this topic with a number of people lately.

I quickly pulled up two of Professor Sarasvathy’s papers, and thought there’s a fundamental insight here. The first paper, which she co-authored with Herbert Simon back in 1996, is entitled “Perceiving and managing business risks: differences between entrepreneurs and bankers” (J. Econ. Behav. & Org. 33:207-225 (1998)). Conclusion one has to do with purely financial risk and return. Entrepreneurs pick a comfortable level of risk and push creatively to increase returns at that level. Bankers pick a target return and try to find ways to reduce the risk. Conclusion two has to do with risk, cost, and benefit trade-offs when dealing with money on one hand and human life and health on the other. While for both entrepreneurs and bankers, legal and ethical considerations predominated over financial issues, the entrepreneurs were more willing to interject personal ethics, and had a broader view of their “sphere of control.”

The second paper is entitled “What Makes Entrepreneurs Entrepreneurial?” The subject is how entrepreneurs reason, and the paper contrasts causal or predictive reasoning with effectual reasoning. The former reasons out means to a given end; the latter reasons out ends given a set of means. In marketing, classic causal reasoning says, for example, that we will first define the product (the end), then the market, then segments, then target and position and in so doing find the customer for the product (the means). In effectual reasoning, the entrepreneur starts with who she is, what she knows, and who she knows (her means) and from that decide what the product and who the customers should be (the end). The Smith-Ibrahim essay actually has an example of this, in which a health club executive constrained by the corporate opportunity doctrine from opening his own health club in a vacant building decides to open a sporting goods store instead.

This seems to me to be an elegant theoretical approach to the classic retort from business people to lawyers (the horse to the fly?): “all you ever say is ‘no’.” At least in the classic confrontation, the entrepreneur would be exploring ends, given means, and the lawyer would keep focusing on the problems of using those means to whatever was the last end suggested by the entrepreneur.

Oh, Wilbbburrrr!

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