Contracting Among Founders

54 Pages Posted: 7 Dec 2011 Last revised: 10 Oct 2013

See all articles by Thomas F. Hellmann

Thomas F. Hellmann

University of Oxford - Said Business School; University of Oxford - Said Business School

Veikko Thiele

Queen's University - Smith School of Business

Date Written: October 9, 2013

Abstract

This paper develops a theory of contracting among founders of a new firm. It asks at what stage founders agree to commit to each other, how they structure optimal founder contracts, and how this affects team formation, ownership, incentives, and performance. The paper derives a trade-off between upfront contracting, which can result in teams with ineffective founders, versus delayed contracting, which can enable some founders to appropriate ideas and start their own firms. Delayed contracting becomes more attractive when there are significant doubts about the skills of founders. Contingent contracts with vesting of shares may be used to mitigate inefficiencies in the team formation process. Interestingly we show that outside investors cannot easily undo ex-post inefficient founder agreements. We also show that laws that provide protection to implied partnerships may have the unintended effect of encouraging more formal contracting.

Keywords: Entrepreneurship, partnership, founders, contracting, vesting, skill uncertainty, contract law

JEL Classification: D82, D86, K12, L26

Suggested Citation

Hellmann, Thomas F. and Thiele, Veikko, Contracting Among Founders (October 9, 2013). Available at SSRN: https://ssrn.com/abstract=1968696 or http://dx.doi.org/10.2139/ssrn.1968696

Thomas F. Hellmann

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 (0)1865 288937 (Phone)

HOME PAGE: http://www.sbs.ox.ac.uk/community/people/thomas-hellmann

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 (0)1865 288937 (Phone)

HOME PAGE: http://www.sbs.ox.ac.uk/community/people/thomas-hellmann

Veikko Thiele (Contact Author)

Queen's University - Smith School of Business ( email )

Goodes Hall
143 Union Street
Kingston, ON K7L 3N6
Canada
+1 613 533-2783 (Phone)
+1 613-533-6589 (Fax)

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