Table 9 - uploaded by Thomas F. Hellmann
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We examine the trade-off between efficiency and equality within the context of entrepreneurial founding teams. Using a formal theory where founders may have preferences over relative outcomes, we derive predictions about the antecedents and consequences of dividing equity equally among all founders. Using proprietary survey data, we empirically tes...
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Context 1
... we do not change the valuation of equal splitters, i.e., we assume that their valuation discount, found in Table 5, remains intact. Table 9 presents results from the counterfactual exercise. It reports the mean and medians for three distinct calculations. ...
Context 2
... we note that the range of estimates for the value at stake with equal splitting varies from a low of $175,945 (median of the discounted value prediction) to a high of $788,637 (mean of the stretched value prediction). While we do not need to take a stance on which of these predictions is the most reasonable, we believe that the main insight from Table 9 is that the values at stake are substantial. 30 Another way of assessing the value at stake is to compare the predicted premium values to the total value held by a typical founder. ...
Context 3
... Another way of assessing the value at stake is to compare the predicted premium values to the total value held by a typical founder. The sixth and seventh rows of Table 9 report the total value of shares held by the average or median founder. Rows eight to ten then show the relationship between the predicted premium value and this total share value. ...
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Citations
... Solo founders face greater resource constraints, but they enjoy some advantages as well. For example, solo founders do not share equity and control with others and they avoid role dilemmas (overlapping roles vs. division of labor) and conflicts with partners (Hellmann & Wasserman, 2017). ...
... While few studies have tested the differences in EGAs between solo and non-solo founders, it is likely that non-solo founders form more ambitious EGAs for two reasons. First, as non-solo founders share equity with their partners, to achieve the same return they need their ventures to be larger than those led by solo founders, generating stronger growth motivations (Hellmann & Wasserman, 2017). Second, non-solo founders are often more capable of growing their ventures, as their partners bring important growth-generating resources (Florin et al., 2003). ...
Plain English Summary
This study reports that climate risk positively affects EGAs, which suggests that climate risk encourages entrepreneurs to scale up their ventures and generates opportunities for them to do so. Thus, entrepreneurs should proactively leverage climate risk to boost the growth of their ventures. This study also finds that the impact of climate risk on EGAs is stronger for female entrepreneurs. While female entrepreneurs have difficulties to grow their ventures, they can exploit climate risk to realize the objectives. Third, the study finds that the effect of climate risk on EGAs is stronger for non-solo founders than for solo founders, suggesting that entrepreneurs can more effectively respond to climate risk by partnering with others.
... In order to arrange the optimal VC contracts, many studies have been conducted in the field of double-sided moral hazard between the entrepreneurs and VC funds as investors [17,42,43] and also have been dealt with ownership sharing arrangements among the members of an entrepreneurial team [44,45]. However, theoretically and especially practically, little attention has been paid to ownership sharing between the entrepreneur and investor during VC financing [6,13], which to the best of our knowledge, related studies have been mentioned as follows. ...
Venture capital (VC) financing is associated with the challenges of double-sided moral hazard, and uncertainty, which leads to the difficulty in estimating the venture's value accurately and consequently the impossibility of determining the optimal equity sharing between the entrepreneur and investor. Traditionally, convertible preferred equity mechanisms used to be implemented as an incentive to decline moral hazard. However, despite the emphasis on investor risk-taking, such mechanisms transfer the investor risk to the entrepreneur and do not mitigate the incentive of opportunistic behaviors. Furthermore, according to the literature review, and to the best of the authors' knowledge, there has not been developed any practical mechanism for equity sharing in VC financing up to now. This paper proposes a fair equity sharing mechanism, which alleviates the above-mentioned deficiencies. It adjusts both parties' share during the equity dilution in each stage of financing, regarding the difference between the venture's ex-ante and ex-post values. Moreover, it manages uncertainty by applying staged financing and the option of abandonment at the end of each stage. The proposed mechanism has been verified by using mathematical tools and drawing its curves for a case study.
... (i) Relationships It is important for cofounders to judiciously decide the kind of startup cofounders they should take along, with the diversity of skillset perspective, (ii) Roles It covers the decision regarding the division of key responsibilities, assignment of designations, and the allocation of decision-making powers amongst cofounders, and (iii) Rewards This emphasizes on the division of ownership equity amongst cofounders, as much as the distribution of resultant benefits amongst them. A misalignment in the three Rs can result in a conflict (Hellmann & Wasserman, 2017;Wasserman, 2013). ...
Technology startups are exposed to multiple challenges. One of the key challenges is conflict, as it has a decisive role in the technology startup evolution. This study examines the effect of conflict on the following two counts: How do conflicts differentiate the success or failure of technology startups? How do conflicts impact the startup lifecycle comprising multiple stages of formation? The studies on conflict are few in the context of an emerging economy like India. This study explores the role of conflict by gathering primary data from 151 cofounders (101 who have experienced failure and 50 who are successful and continuing their operations) from India's six leading technology startup hubs. The presence of cofounder conflicts or Investor conflicts increases the odds of failure of technology startups. 1. The cofounder(s) should navigate and resolve the potential conflict issues related to relationships, roles, and rewards. Besides ensuring the cofounder's agreement, having an effective issue resolution mechanism is required. 2. The strategic intervention of investors coupled with the proper governance structure can lend a helping hand in minimizing conflicts. The epiphanies from cofounder(s) perspectives offered practical suggestions for conflict resolution between cofounders and investors.
... The average team size was 2.88 (SD = 1.18) and ranged from two to eight members. This size is consistent with previous studies on early ventures (e.g., 2.8 in Hellmann & Wasserman, 2017;or 2.3 in Nuscheler, Engelen, & Zahra, 2019) and roughly matches the team size of 2.4 members reported in a representative survey of startups in Germany (Ripsas & Tröger, 2015). On average, the teams had worked together for 2.92 years (SD = 1.28) in their current compositions. ...
Greed is an excessive form of self-interest that leads individuals to pursue material wealth and immaterial desires with little or no concern for the well-being of others. While the literature suggests that greed results in managers acting unethically, a situational strength perspective suggests that this may not always be the case. Therefore, this paper aims at understanding how the new venture context, particularly the role of a team member's affective and cognitive trust in the new venture team, shapes the manifestation of greed in entrepreneurs’ unethical pro-organizational behavior—behavior that allows new venture team members to advance their ventures despite the violation of social norms. Consistent with our theorizing, we find that new venture team members’ affective and cognitive trust in their teams shape the relationship between greed and unethical pro-organizational behavior in opposing ways. Particularly, higher levels of greed are more likely to be connected to unethical pro-organizational behavior when a member's affective trust in the team is high and cognitive trust in the team is low. Our study offers implications for the entrepreneurship and management literatures, alongside implications for practice.
... Moreover, because past performance may influence both R&D decisions and subsequent survival, we created a dummy variable (past performance) that equals 1 if a firm's net profit in the previous year was positive and 0 otherwise (Xu et al., 2019). The capital structure of equity ownership is an important factor for new ventures (Hellmann & Wasserman, 2017), so we controlled for CEO equity, measured as the percentage of equity held by an owner-CEO. Strategic alliances and R&D cooperation foster innovation efficiency and performance (Haeussler et al., 2012;Ortega-Argilés et al., 2005), so we included cooperation, a dummy variable that equals 1 if the focal venture had cooperated with universities, government agencies, or other firms and 0 otherwise. ...
Plain English Summary
While capital is essential for new ventures to innovate and survive, is having more of it always good? Our research shows “No” because more money may “spoil the child” by reducing the benefits that new ventures enjoy from R&D investment. We analyzed 791 new technology ventures across six years and found evidence of a side effect of munificent financial resources, such that when ventures have high levels of financial munificence, they garner fewer survival benefits from increasing R&D. This side effect is weakened when ventures have CEOs who are more experienced, highly educated, or female. These findings extend previous research on the limitations of financial munificence by showing its negative moderating effect on the R&D–survival relationship. For entrepreneurs and venture capitalists in the industry, we advise caution regarding the role of abundant financial resources in new ventures.
... Finally, decisions on new product development are likely influenced by other stakeholders such as employees, investors, or board of directors where terminating a project could mean significant layoffs or a drastic decline in stock price/firm value. Thus, we encourage future research to employ more fine-grained manipulations such as teams with and without equity ownership (Hellmann & Wasserman, 2017), ventures with various stakeholder powers (Hampel et al., 2020), resource scarce versus resource abundant ventures (Hanlon & Suanders, 2007), pre-revenue versus post-revenue ventures (Marvel et al., 2021), family versus non-family ventures (Ko et al., 2021), and/or corporate versus noncorporate ventures (Covin et al., 2018) as they examine entrepreneurial persistence with losing projects. ...
Persisting with a losing project (i.e., a new product development project facing superior competition) is a social endeavor that can increase the costs of failure to the entrepreneur and other stakeholders. Yet, it tends to be explained almost exclusively in terms of intrapersonal predictors, such as the sunk cost fallacy. This paper examines whether, how, and under which conditions interpersonal influence, such as the intensity of a team’s recommendation to persist with a losing project, encourages entrepreneurs to persist. Drawing from the psychologies of escalation and self-regulation, we build a model of entrepreneurs’ undue persistence that we test through experimental design and conjoint analysis. We find that an entrepreneur’s decision to persist with a losing project is determined partly by the team’s recommendation to persist and that the strength of this effect varies across entrepreneurs based on their self-regulation and experience.
... n.s.). In line with prior research, which suggested that unequal equitydistribution leads to superior performance (Hellmann & Wasserman, 2017), we found a positive association between the variance in equity splits and team profits (b = 28.60, SE = 17.10, p < .10). ...
... n.s.). In line with prior research, which suggested that unequal equitydistribution leads to superior performance (Hellmann & Wasserman, 2017), we found a positive association between the variance in equity splits and team profits (b = 28.60, SE = 17.10, p < .10). ...
Successfully navigating through critical uncertainties during the incipient stages requires new ventures to develop learning systems, and building the right team may be key in this process.
Drawing on prior work indicating that entrepreneurial teams form using either an interpersonal attraction strategy (relationships with similar others in a close network) or a resource-seeking
strategy (instrumental focus on complementary skills), we theorize that a dual formation strategy, although challenging to execute, is critical for early performance. Using dual formation strategies
from the onset fosters the development of stronger transactive memory systems, because close relationships facilitate smooth coordination among founders specializing in complementary tasks.
Transactive memory systems thus mediate the relationship between formation strategies and early entrepreneurial success. Findings from two field observational studies and a field intervention
study support our theory: teams formed based on a dual strategy raised greater seed funding on Kickstarter – a leading crowdfunding platform (Study 1), were more successful in a prestigious entrepreneurial competition (Study 2), and gained more profits from selling their initial products (Study 3). Our research advances knowledge on entrepreneurial team formation and offers practical recommendations to facilitate this process at such nascent, but critical stages.
... Nevertheless, there are some hints towards its importance (especially the distribution of equity) that lay the foundation for further research in this regard. The distribution of shares is shown to be a core decision in entrepreneurial teams (Hellmann and Wasserman 2016). Low perceived fairness due to the distribution of shares, then, can trigger negative interaction spirals, which further lead to ETMEs . ...
Entrepreneurial teams are dynamic entities that frequently experience the exit of individual team members. Such entrepreneurial team member exits (ETMEs) entail serious consequences for the exiting individual, the remaining team, and the performance of the affected venture. While ETMEs are receiving increasing scholarly attention, the research landscape is still considerably fragmented. This is the first article to take stock, analyze, and discuss this crucial and emerging field of research by providing a systematic review of the literature on ETMEs. We identify central themes comprising of antecedents, routes, consequences, and the contextual embeddedness of ETMEs and integrate them into a comprehensive processual framework. Based on this framework, we contribute to the research on ETMEs by discussing the themes in the light of promising theoretical perspectives, introducing novel ideas, concepts, and approaches to enrich future avenues. Specifically, we propose to expand the concept of team heterogeneity to advance our understanding of antecedents as well as to investigate power relations and negotiation behavior within ETME routes. In addition, we offer ways to resolve the sometimes inconsistent findings in terms of venture consequences and present a fertile approach for a more in-depth cultural contextualization of the phenomenon.
... One exception is Hellmann and Wasserman (2016) who model this process and test it using survey data. A difficulty of equity splits is an ability to correctly predict each founder's relative value; moreover, a split that does not allocate equal equity among all founders signifies that some founders may be more valuable than another founder (cf. ...
... For example, Breugst, Patzelt, and Rathgeber (2015) develop a case study of eight teams and find that there is substantial variation in the perceived distributive justice of equity splits across and within teams in their sample. In their survey data of innovation-driven ventures, Hellmann and Wasserman (2016) find that 32 percent of founding teams equally split venture equity and that 42 percent of teams decide on this split within one day. Furthermore, they find that this equal split is correlated with a lower likelihood of raising outside capital. ...
