Ownership dynamics within founder teams

The role of external financing

Thomas F. Hellmann, Paul H. Schure, Chloe Jeanne Tergiman, Dan H. Vo

Research output: Contribution to journalArticle

Abstract

Research Summary: This paper examines how founders within start-up teams dynamically readjust their relative ownership stakes. It leverages a unique dataset from British Columbia, Canada, which contains detailed information on founder ownership over time. Two trade-offs between efficiency and fairness are identified, one at the time of founding, the other as the venture develops. Teams with a preference for fairness at the start, as revealed by an equal division of the founder shares, also exhibit a dynamic preference for fairness, as witnessed by their reluctance to change the ownership structure over time. Relative founder stakes are more likely to change when a company raises investments. Larger rounds and lower valuations are associated with bigger changes in relative founder stakes. Managerial Summary: Splitting the equity stakes among founders involves a delicate trade-off between efficiency and fairness. This trade-off is made when founders determine their initial division of equity, and also as the venture develops. We find that teams with a preference for fairness, as revealed by an equal split of their original founder equity, are also unlikely to change their relative stakes over time. We also find that changes in the division of founder ownership often coincide with external financing rounds, suggesting that renegotiations within teams are more easily settled in the presence of outside investors. Overall, the evidence suggests that although notions of fairness inhibit changes to the relative founder equity stakes, the stakes are not set in stone, and financing rounds provide opportunities for recalibration.

Original languageEnglish (US)
JournalStrategic Entrepreneurship Journal
DOIs
StateAccepted/In press - Jan 1 2019

Fingerprint

Ownership
External financing
Fairness
Equity
Trade-offs
Venture
Canada
British Columbia
Financing
Start-up
Investors
Leverage
Renegotiation
Ownership structure

All Science Journal Classification (ASJC) codes

  • Business and International Management
  • Economics and Econometrics
  • Strategy and Management

Cite this

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abstract = "Research Summary: This paper examines how founders within start-up teams dynamically readjust their relative ownership stakes. It leverages a unique dataset from British Columbia, Canada, which contains detailed information on founder ownership over time. Two trade-offs between efficiency and fairness are identified, one at the time of founding, the other as the venture develops. Teams with a preference for fairness at the start, as revealed by an equal division of the founder shares, also exhibit a dynamic preference for fairness, as witnessed by their reluctance to change the ownership structure over time. Relative founder stakes are more likely to change when a company raises investments. Larger rounds and lower valuations are associated with bigger changes in relative founder stakes. Managerial Summary: Splitting the equity stakes among founders involves a delicate trade-off between efficiency and fairness. This trade-off is made when founders determine their initial division of equity, and also as the venture develops. We find that teams with a preference for fairness, as revealed by an equal split of their original founder equity, are also unlikely to change their relative stakes over time. We also find that changes in the division of founder ownership often coincide with external financing rounds, suggesting that renegotiations within teams are more easily settled in the presence of outside investors. Overall, the evidence suggests that although notions of fairness inhibit changes to the relative founder equity stakes, the stakes are not set in stone, and financing rounds provide opportunities for recalibration.",
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Ownership dynamics within founder teams : The role of external financing. / Hellmann, Thomas F.; Schure, Paul H.; Tergiman, Chloe Jeanne; Vo, Dan H.

In: Strategic Entrepreneurship Journal, 01.01.2019.

Research output: Contribution to journalArticle

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