Louise Lee reported earlier this week at The Wall Street Journal Online that, “Many company founders love the idea of dividing their firm even-steven. But that warm and fuzzy solution might actually hurt the company down the road.
“That’s the conclusion of a study examining 1,367 ventures from 2008 through 2013. The research found that founders who divided company equity equally were less likely to attract money from investors and had lower valuations when they did raise financing.”
The Journal article noted that, “Why? An equal division of equity may be a red flag to investors, says Noam Wasserman, incoming founding director of the Founder Central Initiative at the University of Southern California, who co-wrote the paper with Thomas Hellmann of the University of Oxford.
“Prospective investors may fear that founders in an even split didn’t take the time to ask awkward but important questions, such as who’s contributing what to the venture and how much impact and commitment each founder might bring in the future, says Mr. Wasserman. And investors may think the founders may not be able to negotiate other hard issues that arise later. ‘As an investor, I’m going to be very worried that after I invest in this company and they’re trying to build it by negotiating with customers and future investors, they’re not going to be able to do that well either,’ he says.”
Ms. Lee indicated that, “The research suggests that founders who have an early discussion about equity can learn valuable lessons in negotiation and communication. A frank talk about equity stakes ‘is just one of the very difficult conversations you’re going to face as a team,’ Mr. Wasserman says. ‘It’ll also send a better signal to investors and other outsiders who are evaluating how well you’re going to be able to do this.'”
