CDIRL is based at Berkeley Law. The overarching goal of our research is to understand psychological processes related to diversity and inclusion in order to address the challenges of working, living, and learning in diverse environments. The primary foci of our lab are: people’s beliefs about and reactions to diversity and the relationship between psychology and law in several areas: immigration, property, contracts, juries, and sentencing.
The Venture Capital (“VC”) industry in the United States plays an important role in innovation and emerging technologies across the globe—it has helped to anoint the world’s four most valuable companies (Schmidt, 2003). Despite this enormous impact, there is effectively no legal backstop that ensures non-dominant groups (e.g., women and Black people) have an equal opportunity to share in its wealth creation and innovation. While many VCs have pledged efforts to increase representation in VC firms and in investment to founders from non-dominant backgrounds, racial disparities persist (Pardes, 2021). This project aims to uncover the ways in which certain diversity ideologies and industry-wide contracting practices may coalesce to form an insidious and less visible form of discrimination impacting the diversification of VC. Specifically, this project examines how implicit psychological preferences for group-based dominance and hierarchy impact contractual decisions, especially in VC contexts with stated values of diversity.
Contracting is an important, often less visible way through which racial discrimination emerges and racial hierarchies are reproduced in VC. Contracting standards, and specifically, the use of control terms, offers a useful way to track how racial discrimination may be operating in VC even when VCs invest in founders from non-dominant groups (e.g., women, Black people). Control terms are provisions in VC contracts that give investors control over many activities of a founders’ company limiting what founders can do with the company without investors’ permission (Feld, 2016). Control terms in VC contracts are an industry standard but may function as a particularly insidious form of discrimination that keeps Black founders bound and controlled in ways that White founders are not. These “dominance terms” may impact the nature of investment in founders from non-dominant groups and ultimately shape their long-term success.
I have created a dataset including over 700 contracts from VC deals modeled after contract templates from the National Venture Capital Association (“NVCA”). Using criteria that limited inclusion to only Series A investment deals of at least $1 million based in the US from the years 2018 - present, we have begun to isolate and code the control terms in these contract deals. We have also coded the race of the founder funded by each deal as well as the stated diversity commitments in the websites of each VC. We hope that Natural Language Processing (NLP) and machine learning models will help us better code the presence and severity of terms in the contracts in this dataset to analyze any racial differences that may arise.
Increasing investment into founders from non-dominant groups can be a means of empowering non-dominant groups and disturbing the racial hierarchies that bar non-dominant groups entry into Tech. However, if investment from VC is conditional on continued racial hierarchical arrangements via contracting, it may not achieve the aims of diversity. Specifically, if investment in founders from non-dominant groups comes with a level of control in the contractual terms that White founders do not regularly experience is it empowerment or institutionalized dependency and extraction?