Startup Equity Splits & Stability

Noam Wasserman, professor in the Entrepreneurial Management unit at Harvard Business School, has the best actual diagnosis of startup founding problems around. (At least that I can find.) Best of all, he makes sense and shows his empirical data.

 

Equity-Split Results, Part 1: When Do Teams Split Equally?

The table below summarizes how these factors tended to increase versus decrease the chances that the equity would be split equally.

Interestingly, the prior relationships among the founders (friends vs. co-workers vs. strangers) did not have any significant effects on the equality of the split in either direction, either because they are non-factors, or because they include conflicting effects that largely cancel each other out.

Equity-Split Results, Part 2: Implications for Team Stability

The table below shows the major factors that had statistically significant effects (at the p<.05 level or better) on team stability (defined as whether all founders were still working or not) at each 6-month milestone, with a "+" showing a significant positive effect on team stability and a "-" showing a significant negative effect on team stability.

998 founders from 326 multi-founder technology ventures.

In non-table form, the results are as follows:

1. When the team invested the same amount of financial capital at founding, the team tended to be more stable throughout the 2 years.
2. When the team had a heterogeneous (i.e., widely differing) amount of prior work experience, the team tended to be less stable for the first 12 months, after which the effect became insignificant.
3. When the team split the equity equally, it tended to be more stable throughout the 2 years.

However, this last result (#3 above) is counter-balanced by two factors:

• Teams that split the equity equally and raised a round of outside financing during a period tended to be much less stable in that period, any time during the first 2 years. (In its magnitude, this effect completely washed out the positive effect from #3 above.)
• Teams that had been friends before founding and split the equity equally tended to be less stable for the first 6 months, after which the effect was insignificant.