California Wants to Crack Down on Sexual Harassment by Venture Capitalists

August 28, 2017, 3:19 PM UTC
State capitol building, Sacramento, California
Education Images—UIG/Getty Images

A rash of sexual harassment scandals this summer involving venture capitalists has laid bare a major weakness in laws meant to protect workers from unwelcome advances. While legislation is clear on many workplace interactions, there’s next to nothing on the books concerning the investor-entrepreneur relationships accounting for billions of dollars in startup funding.

California legislators are proposing a change that would cover these types of interactions, creating the prospect of a wave of lawsuits against VCs. Changes to California law would also provide a template for other states.

One of the first bills the California legislature will consider when it returns from recess in January would prohibit investors from sexually harassing founders. The proposal is simple: Add one word, “investor,” to a list of professionals who can be held liable for harassment. The state has carved out similar provisions to cover landlords, teachers and real-estate agents.

Venture investors somehow escaped scrutiny previously, despite their outsized roles as technology kingmakers. The industry is about 90 percent male, and women are similarly outnumbered when it comes to raising venture capital. Female founders represented 7 percent of venture-backed companies in an analysis by Bloomberg last year.

The industry recently began to grapple with harassment issues after more than a dozen women told stories of mistreatment when they sought funding, pushing at least four men to leave their VC firms in recent months. The initial response was to create a “decency pledge,” in which investors promised not to be predators and report bad behavior. “There is a cultural zeitgeist on harassment issues,” said Noreen Farrell, executive director of Equal Rights Advocates, which supports the proposed bill. “We’ve heard from the mouth of industry that some clarification is needed, and we will enlist them to make the case.”

State Senator Hannah-Beth Jackson outlined a proposed bill last week. Changing the law in California will create clear consequences by forcing investors to behave professionally or risk being sued. Jackson, a Democrat who authored 2015’s landmark fair-pay reform that cracked down on employers’ ability to discriminate against women, said the power dynamic between venture capitalists and entrepreneurs pursuing their dreams can create inequity that requires legal protection. “There is clearly an imbalance of power between those with financial wherewithal and those with ideas trying to get a foothold,” she said.

The law’s proponents plan to cultivate support during the state legislature’s recess, which starts next month. Democrats control both chambers of the California legislature and the governor’s office. The bill needs a simple majority to pass. The National Venture Capital Association, the industry’s trade group, said it welcomed the effort and would work with Jackson but hasn’t yet taken a formal position on the proposal.

California is pivotal in the fight for gender equality in technology. It’s the epicenter for the industry’s companies and the investors who fund them. Last year, VC firms in California raised $27.6 billion, more than the next two dozen states combined, according to the industry’s trade association. California is also a pioneer in employment and civil rights law, setting agendas that other states frequently follow. “California is a catalyst, and then the rest of the country catches on,” said Pamela Mason, vice president of Mason & Mason, a Massachusetts-based corporate insurance firm with clients from roughly 100 VC and other investment firms.

The number of harassment claims against investment firms had been increasing during the past year or two, Mason said. Alleged victims have relied on civil statutes to build their cases in the absence of clear language in the law. VCs almost always settle to avoid risking their reputations, she said. Kleiner Perkins Caufield & Byers faced one of the rare gender discrimination lawsuit against a VC firm to go to trial in recent years. Kleiner Perkins won the suit against former employee Ellen Pao, though it inflicted damage on the firm’s reputation. The wounds are poised to reopen with the publication of Pao’s book, expected next month. “We are a relatively litigious society,” said Mason. “This bill adds more fuel to the fire.”

Women have been more apt to come forward recently after high-profile cases involving Bill Cosby and executives at Fox News, according to Kelly Armstrong, a San Francisco employment rights attorney. As a result of the added scrutiny, VCs have been working to improve internal policies, said Dan Berry, a partner at Woodruff Sawyer & Co. which counts 250 venture capital and private equity firms among its clients. He said firms have bolstered sexual harassment training for employees, with some going from zero or one session a year to two or three.