Company founders warned over initial share splits

Company founders warned over initial share splits

Divide shares according to contribution, says professor

Newly-released research shows a start-up company’s worth will increase by 10 per cent in its first term of operation if its founders negotiate their individual shareholding in the business.

Visiting professor of entrepreneurship at Melbourne Business School, Thomas Hellmann, said the way start-up company partners decide the division of shares will affect its future value.

According to Hellmann, the value expected is about 10 per cent of the firm equity, 25 per cent of the average founder stake or $450,000 in net present value.

His research, based on high technology start-up companies, showed a company’s worth is lower if its founders hastily consent to an even distribution of shares rather than spend more time negotiating it.

Hellmann said, “A third of all start-up companies surveyed by this research split shares equally between founders [and] almost half spent less than one day negotiating [it].”

He said the key finding from the research was if founders fail to effectively negotiate their share or if they quickly consent to an equal split to avoid conflict, their new enterprise will later be valued less than it could have been.

The main reason for entrepreneurs deciding upon an equal share distribution is to avoid conflict, Hellmann said.

“Face up to that conflict early on; Do your homework on what each founding member can contribute to the venture and divide the shares accordingly,” he said.

Hellmann suggested using a founder vesting scheme – a contract which distributes shares further down the track according to operation highlights.

He revealed, “There is no recipe for how to do this, but if you do go through this more complex process and at the end agree [on splitting] shares equally, then your company valuation will not suffer a 10 per cent discount.”

The research also presented three other findings:

  1. People who split shares equally are more likely to have the entire team fall apart or individual founders leave
  2. Family teams are more likely to split equity equally
  3. Age differences don’t affect share holdings, but serial entrepreneurs who started other ventures will tend to get an eight per cent greater shareholding

The results derive from a research survey of 511 high technology start-up companies over five years.

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