Founder premiums, venture capital investments and acquirer benefits

Abstract

This study investigates whether the retention of founders has a greater impact on deal prices and acquirer benefits compared with the retention of family successors or CEOs when private firms pursue a merger exit strategy. The results demonstrate that higher prices and returns can be achieved when founders remain postmerger. These findings hold up even when considering the acquirer's long‐term operating and market performance, indicating the robustness of the results. Additionally, the study reveals that the effect of founder retention is larger than that of CEO retention, and the effect of founder‐CEO retention is the largest. Furthermore, the study examines multistage investments and exits, revealing that venture capitalists can trade off the benefits of founder maturity and firm growth. This implies that founder premiums vary with the enterprise life cycle. Finally, the study investigates the mechanism behind these results, finding that venture capital backing, high‐tech industry, earnouts and stock‐for‐stock deals as moderators can significantly enhance the founder‐retention effect on acquirer benefits. This study proposes that the specific human capital and entrepreneurial spirit of founders, transcending ownership, emerge as driving forces behind this effect. Founder heterogeneity also suggests that acquirers can benefit more from founder retention when founders are innovative talents or serial entrepreneurs.