Why Your Co-Founder Shouldn't Get Half the Company

Last Updated May 25, 2011 9:01 PM EDT

Entrepreneurs have to be prepared to wheel and deal. That being said, the first deal is often one of the hardest: How much ownership should each founder have in the new venture? Should the equity be split equally among all the founders, or are some founders more equal than others?

A new paper from Thomas Hellmann, of the Sauder School of Business at the University of British Columbia, and Noam Wasserman of Harvard Business School, takes a look at how and why founding teams divide the shares of their company. Among their surprising findings: Companies where the founders split shares equally generally receive lower valuations from venture capitalists than companies with unequal equity splits among the founders.

Why Equal Splitting Brings Lower Valuations
Hellmann and Wasserman look at the equity splits of 1,476 founders in 511 private companies, as tallied by the annual CompStudy survey of technology and life sciences companies. They found that:

  • About a third of founding teams split the shares evenly. Doing so fosters teamwork, avoids arguments and negotiation, and is generally fast and easy.
  • Equal equity splits show a general preference for equality. Those who split equity equally are also likely to have the same salaries and bonuses. So it's not as if some founders are taking an equal share of equity but then compensating by having wildly different cash or bonus arrangements. The authors suggest that basically, these founders are more altruistic and less selfish.
  • Teams that are related through family are more likely to split shares equally.
  • Teams with more experienced founders are less likely to split shares equally.
  • Bigger teams less likely to split shares equally.
  • Equal splitting is associated with a lower first round valuation from outside investors. When companies go to raise money from venture firms, equal splitters get an average valuation of $5 million, while unequal splitters get average valuations of $5.5 million. That's not necessarily because of the equity split itself. Instead, the researchers suspect that at least some of those who choose to split shares evenly are either reluctant or unskilled negotiators-whether they're dealing with each other or with venture capitalists. They probably negotiate harder with customers and new employees too. To the extent that doesn't antagonize potential partners, customers, or staff, it may add to the value of the company.
  • Teams with more work experience are less likely to split equally. But an individual with more work experience isn't necessarily going to get a larger share of the company.
  • Serial entrepreneurs tend to get more equity.
  • The idea person tends to get more equity.
  • Anyone who invests money into the venture tends to get more
What would make you give a business partner more --or less-- than half of a new venture?


Image courtesy of flickr user Sahaja Meditation
Kimberly Weisul is a freelance writer, editor, and editorial consultant. Follow her on twitter at www.twitter.com/weisul.
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    Kimberly Weisul is the co-founder of One Thing New, the free email newsletter for smart, busy women. She was previously Senior Editor at BusinessWeek, responsible for all coverage of entrepreneurship and for launching BusinessWeek SmallBiz, a bimonthly magazine. She is also a freelance writer, editor and editorial consultant.