Instant MBA: The case against going Dutch

If you’ve ever started a business with partners, you’ll be familiar with the ordeal of splitting equity. To keep things simple and ward off hard feelings, many entrepreneurs opt to divide co-founders’ shares evenly. But doing so may actually depress your firm’s valuation and ability to raise capital later, according to new research co-authored by Thomas Hellmann, a professor at the Sauder School of Business in Vancouver.

Drawing on the experiences of 1,476 founders of 511 Canadian and U.S. high-tech startups, Hellmann found that venture capitalists tend to discount the valuation of firms with even-steven ownership by about 10% compared with companies in which co-founders hold varying stakes. One reason? Financiers see unequal division as evidence of a higher calibre of entrepreneurship, since determining uneven allocations requires owners to bargain heavily among themselves. This, the research found, serves as a sign to investors that a firm’s owners are master negotiators who will broker better deals with customers, suppliers and employers.