Yale Case. By: Alex Hodgkin, Matt Littell, and A. J. Wasserstein
This Yale case examines the inherent conflicts of interest between entrepreneurs and investors in the SF model. While ETA is widely viewed as a highly attractive post-MBA pathway, offering capital access, mentorship, CEO roles, and wealth creation, the authors argue that misalignment between talent and capital is inevitable at certain stages of the process.
The case defines a conflict of interest as a situation in which one party prioritizes personal interests over fiduciary, legal, or moral duties to the other party, even while formally complying with governing agreements. These conflicts are not portrayed as ethical failures, but rather as structural and situational tensions embedded in the ETA model.
The authors identify ten common conflicts, divided equally between entrepreneur-driven and investor-driven sources:
Entrepreneur-based conflicts include:
- Entrepreneurs behaving like option holders, incentivized to close deals or pursue high-risk strategies because they benefit from upside without bearing equivalent downside risk.
- Entrepreneurs who may not genuinely want to be long-term operating CEOs and instead seek a quick exit to become investors.
- Misaligned exit timing, where CEOs may push for premature liquidity or hold on too long for personal reasons.
- Information asymmetry, where entrepreneurs control the flow and framing of information, potentially withholding or minimizing bad news.
- Capital allocation decisions that improve the entrepreneur’s personal experience, reputation, or career prospects more than investor returns.
Investor-based conflicts include:
- The unilateral ability of investors to fire CEOs, while CEOs cannot remove investors.
- Investors backing competing companies or sitting on rival boards, creating loyalty and confidentiality tensions.
- Pressure on CEOs to roll equity or accept unfavorable terms during exits, especially in private equity sales.
- Investor influence over the cap table and advisory network, which may reduce independence and favor investor interests.
- Portfolio-level optimization by institutional investors, sometimes at the expense of individual companies or CEOs.
The case concludes that these conflicts are unavoidable and endemic to the ETA structure. Rather than proposing solutions, the authors aim to raise awareness so entrepreneurs and investors can anticipate, discuss, and manage these tensions rationally. Despite its flaws, the ETA model remains highly compelling, provided participants enter it with clear eyes, realistic expectations, and mutual empathy.
Read the full case in: https://som.yale.edu/sites/default/files/2026-01/Exploring%20Bilateral%20Conflicts%20of%20Interest%20Between%20Entrepreneurs%20and%20Investors%20in%20Search%20Fund%20Projects.pdf
Some reflections on this case:
1/ These conflicts are features, not bugs
From a practitioner’s standpoint, the conflicts outlined in the case are structural to the ETA model, not accidental. The model works precisely because entrepreneurs are incentivized with asymmetric upside and investors retain governance control. Attempting to “fix” these tensions often weakens the economic engine that makes search funds attractive in the first place. The real skill in ETA is not eliminating conflicts, but recognizing them early and managing them explicitly.
2/ The option-like nature of the entrepreneur role is underestimated by first-time searchers
Many first-time searchers underestimate how strongly the option-holder dynamic shapes their own behavior. As deal fatigue sets in, incentives quietly shift from “best deal” to “any deal.” Experienced investors watch closely for this inflection point. High-quality investor groups often slow searchers down near the end of the search period, not because they dislike deals, but because they understand how easily discipline erodes under time pressure.
3/ Information asymmetry is unavoidable, but transparency builds investor trust capital
In practice, investors expect imperfect information. What differentiates top-tier CEOs is not flawless execution, but early disclosure of bad news. CEOs who surface problems early tend to receive more support, not less. Conversely, CEOs who “manage the narrative” too aggressively often lose credibility, which can accelerate governance intervention later.
4/ Exit timing is where misalignment becomes most emotionally charged
Liquidity events are where theoretical conflicts become very real. Entrepreneurs often anchor on personal liquidity and life-stage needs, while investors focus on IRR, multiples, and fund dynamics. In well-functioning partnerships, exit expectations are discussed years in advance, not during a live sale process. When these conversations are delayed, outcomes frequently feel unfair to at least one party.
5/ Institutional capital has changed the search fund experience
The professionalization of search investing has brought deeper capital pools and higher valuations, but at a cost. Many modern ETA investors are spread thin across boards, and operational mentorship is increasingly delegated. Searchers should not assume that early fundraising access equates to ongoing operating support. Investor selection now matters as much as capital itself.
6/ Cap table construction quietly determines future power dynamics
Experienced practitioners know that a “diverse” cap table can behave like a bloc if investors are socially or economically aligned. Entrepreneurs who fail to understand informal investor coalitions may be surprised when governance decisions feel pre-coordinated. A small number of truly independent voices on the board can materially change CEO outcomes.
7/ The best SF relationships are built on empathy, not contracts
Legal documents matter, but they rarely resolve the hardest moments. The most successful ETA partnerships are characterized by mutual perspective-taking: investors who remember what it feels like to operate, and entrepreneurs who understand portfolio-level realities. When trust is high, conflicts are navigated; when trust is low, agreements are weaponized.
