How to Split Founder Shares
After a year at Stanford business school no class had discussed academic research on splitting founder equity—though I’d asked frequently. Weird. Finally I found something useful, notably from the University of Calgary and HBS, drafted just last month. Happy Canada Day everyone!
The First Deal: The Division of Founder Equity in New Ventures
T Hellmann, N Wasserman
This paper looks at the first financial decision within new companies, examining how founders allocate founder equity. To motivate the empirical analysis we develop a simple theory of costly bargaining, where founders trade-off the simplicity of accepting an equal division of equity, versus the costs of negotiating a differentiated allocation of founder equity. We test the theory’s empirical predictions on a proprietary dataset comprised of 1,476 founders in 511 entrepreneurial ventures. We find that teams with more heterogeneous founder characteristics, and teams with higher average experience, are less likely to accept an equal split, while smaller teams and teams where founders have family ties are more likely to split the equity equally. Within teams that adopt a non-equal split, larger equity shares are received by serial entrepreneurs, idea generators and founders who invest their own money . Equal splitting is associated with a lower pre-money valuation in the first round of financing, and this effect is more pronounced for teams that are quick to agree about splitting the equity equally. Counterfactual calculations suggest that founders that accept an equal division of shares may forgo approximately 10% of founder shares, worth approximately half a million dollars.
