The heavy cost of kumbaya–understanding the survival implications of nascent venture ownership structure

Abstract

PurposeThis paper brings in relevant entrepreneurial behavior theory to understand the ownership decisions founders make during the nascent stage of new venture creation, and how such decisions impact the viability of the firm.Design/methodology/approachThe authors examine the behavior and decision making of 137 lead founders during the nascent stage of new venture creation. Psychological ownership and environmental uncertainty are measured of lead founders when dividing up firm ownership among the founding team. Using a longitudinal approach, these nascent-stage decisions are then analyzed to understand the impact on the new venture one year later.FindingsCounter to prior research suggesting teams are better off with identical wages and ownership, the authors find such harmony (i.e. “kumbaya”) pursuit to be a detriment to new venture emergence. Specifically, this study finds that nascent ventures are better off with an unequal ownership split among the founding team members. These findings suggest that nascent firms with an unequal split are more likely to move beyond the nascent stage and launch a functional business.Research limitations/implicationsAlthough the results of this study offer a valuable contribution to lead founders and new businesses, the study looked at each startup independent of another and is therefore not able to draw any conclusions related to competitiveness.Practical implicationsLead founders and founding teams frequently divide ownership evenly among the founders. This paper shows that, while convenient, the decision to divide ownership equally can hamper a nascent firm as it moves toward the launch phase of the startup process. These results should motivate founders to think deeply regarding the ownership structure decision and, at the very least, consider the possible negative costs associated with the pursuit of founding team unity.Originality/valueWhile scholars have brought attention to the nascent stage, few have identified and analyzed the decisions that take place during this critical time of the new venture development process. Furthermore, even is less is known of the impact nascent decisions have on startup launch. This study sheds light on these areas.