The First Deal: The Division of Founder Equity in New Ventures

The First Deal: The Division of Founder Equity in New Ventures

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Article ID: iaor20173298
Volume: 63
Issue: 8
Start Page Number: 2647
End Page Number: 2666
Publication Date: Aug 2017
Journal: Management Science
Authors: ,
Keywords: behaviour, statistics: empirical, personnel & manpower planning
Abstract:

We examine the trade‐off between efficiency and equality within the context of entrepreneurial founding teams. Using a formal theory where founders may have preferences over relative outcomes, we derive predictions about the antecedents and consequences of dividing equity equally among all founders. Using proprietary survey data, we empirically test the predictions. Our central finding is that teams that split equity equally are less likely to raise funds from outside investors. The relationship appears not to be causal, but instead driven by selection effects across heterogeneous teams with varying degrees of inequality aversion. This paper was accepted by David Hsu, entrepreneurship and innovation.

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