Ownership Dynamics within Founder Teams: The Role of External Financing
77 Pages Posted: 20 Aug 2017 Last revised: 10 Feb 2019
Date Written: February 2019
This paper examines how founders within start-up teams dynamically re-adjust 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 witnessed by an equal division of founder shares, also exhibit a dynamic preference for fairness, as witnessed by a reluctance to change ownership 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.
Keywords: Founder teams, ownership change, fairness, external financing, founder shares, dynamics
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