Hiring a Co-Founder

Abstract

Using a novel set of administrative data, we demonstrate that founding teams often add "co-founders" - individuals newly associated with the firm with a substantial equity share - well after their venture has formalized. By taking advantage of the annual disclosure of private firm equity ownership in our dataset, we observe that approximately 12% of growing firms add such a co-founder in the first year following their incorporation. These non-investor, non-employee co-founders are identified across a broad range of sectors in our comprehensive, economy-wide sample. This phenomenon and its prevalence have received scant attention in prior work, including the literature on entrepreneurial founding teams, which tends to assume that the founding team formation process ends at a key early economic transition---in particular, formalization. The practice of adding a co-founder post-formalization raises interesting questions about the early organizational choices of new ventures, and suggests potentially underappreciated strategies for assembling human capital in young, growing firms.

Keywords: New Venture Teams, Strategic Human Capital, Entrepreneurship, Nascent Teams

JEL Classification: L26, M13, O31