Company co-founders often split ownership of their startup equally. It seems fair and simple.
But starting on a level playing field can hurt the company’s chances of getting off the ground.
New research finds that early-stage companies formed with an equal division of ownership, such as 50% each to two partners or 25% each to four, were less likely to have measurable income or employees a year later, Dave says. Noak, assistant professor. entrepreneurship at the Goddard School of Business and Economics at Weber State University in Ogden, Utah.
How much difference did it make? Businesses with an uneven split were 21.7% more likely than other businesses to be in business a year later.
“Teams that are unequally divided, with at least one person having founding control, are more likely to launch and go to market,” says Dr. Noack, who also runs the university’s entrepreneurship centre.
Today, about three out of four startups decide to split the business equally when starting out, he says. The problem, however, is that when the shares are divided equally, no founder feels that he has ownership of the company and the responsibility of managing it. And that often means no one takes over, and the startup stops. So an unequal split, even if it’s 51% owned by one of the two partners, gives a founder a sense of individual ownership and that helps them move forward.
“The key takeaway is that there has to be someone on the team who will ultimately take charge,” says Dr. Noack, whose research was published in the Journal of Small Business and Enterprise Development last year.
The researchers used LinkedIn groups to find companies that were still in the planning stage, 137 in all. They used surveys to understand the psychological ownership of the primary founder and whether the company was able to take off because of this early decision making. (However, they did not study what precise capital divisions were ideal.)
Dr. Noack hopes the research will result in more useful thinking about property division. Companies often want equal ownership to increase harmony and cohesion within a startup, but they don’t take into account the drawbacks, he says. “It all comes down to decision making and who will ultimately feel the pressure on their backs to persevere,” he says.
Ms. Dizik is a writer in Chicago. You can reach her at email@example.com.
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