Academic journal article Journal of Small Business Strategy

Disproportionate Distribution of Stock Ownership among Initial Founders in Startup Ventures: Survey Results and a Ranking of Factors

Academic journal article Journal of Small Business Strategy

Disproportionate Distribution of Stock Ownership among Initial Founders in Startup Ventures: Survey Results and a Ranking of Factors

Article excerpt

ABSTRACT

To date little research has been performed as to how founders of startup ventures determine initial distribution of ownership. In many instances, distribution of ownership is proportionally divided, even though individual contributions to the venture may vary widely. In these circumstances, a disproportionate distribution of ownership would be more reflective of individual contributions to the venture, and more importantly, determine the appropriate incentive (or "reward") for each founder. A survey of business owners was administered, and counter to much of the existing literature, a significant percentage of the respondents divided ownership disproportionately. The survey provides a ranking of factors that can contribute to disproportionate distribution of ownership.

Keywords: founders, division of ownership, ownership, equity, distribution, dilution

INTRODUCTION

Distribution of ownership is important for all businesses, for it ties to not only motivation of team members and their potential financial rewards, but also, in some instances, to control and decisionmaking for the venture. For the focus of this paper, distribution of ownership among the founders of a venture becomes important when the objective of the business is to significantly grow the business and create a harvest or exit event. For a business to grow, it often requires a founding team comprised of members with diverse and complementary skill sets necessary to move the business forward.

This paper is designed to stimulate discussion and research in determining which factors contribute to the disproportionate distribution of initial ownership. Past research has discussed disproportionate distribution of initial ownership but has not attempted to establish a ranked order of the factors. The paper sets forth a ranked order of factors based upon the results of a survey ("Business Ownership Survey" or "BOS"). This research begins a dialog to assist entrepreneurs with divergent skill sets and backgrounds to knowledgeably allocate stock ownership on a disproportionate, yet fair and appropriate basis.

Initially, the paper covers a review of the literature by explaining the role of team contribution to the venture and why disproportionate distribution is important. It then goes on to cover the different factors for the disproportionate distribution of ownership while proposing a ranked order for the various factors based upon the BOS results. The conclusion provides recommendations for future research.

LITERATURE REVIEW

The Importance of a Team

Cachon (1990) concluded that the lone entrepreneur is a mythological being, suggesting that most entrepreneurial organizations require entrepreneurial teams in order to function effectively, while Chowdhury (2005) suggests the battle of the "lonely hero" is giving way to a prevalence of entrepreneurial teams as an emerging economic reality. The entrepreneurial team has been defined as the group of people involved in the creation and management of a new venture (Forbes, et al, 2006: Cooper and Daily, 1997: Kamm, et al 1990). For an entrepreneurial venture to successfully raise external capital often depends upon whether or not it is headed by an effective venture management team (Vanaelst, et al, 2006). Additionally, research has shown that the management team is predominant in the venture capital evaluation process (Zopounidis, 1994).

As Forbes (2006) points out, organizational behavior research about teamwork has focused largely on behavior in existing work teams and in teams without hiring authority, ignoring team formation. Thus, there is little existing theory regarding entrepreneurial team formation.

Ensley, Carland and Carland (1998) require three criteria be met in defining the entrepreneurial team: they (1) have to jointly establish a firm, (2) have a financial interest, (3) have a direct influence on the strategic choice of the firm. …

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