The throne vs. the kingdom: Founder control and value creation in startups

Abstract

Research summary: Does the degree to which founders keep control of their startups affect company value? I argue that founders face a “control dilemma” in which a startup's resource dependence drives a wedge between the startup's value and the founder's ability to retain control of decision making. I develop hypotheses about this tradeoff and test the hypotheses on a unique dataset of 6,130 American startups. I find that startups in which the founder is still in control of the board of directors and/or the CEO position are significantly less valuable than those in which the founder has given up control. On average, each additional level of founder control (i.e., controlling the board and/or the CEO position) reduces the pre‐money valuation of the startup by 17.1–22.0 percent. Managerial summary: A founder's vision and capabilities are key ingredients in the early success of a startup. During those early days, it is natural for the founder to have a powerful, central role. However, as the startup grows, founders who keep too much control of the startup and its most important decisions can harm the value of the startup. Both qualitative case studies and quantitative analyses of more than 6,000 private companies highlight that startups in which the founder has maintained control (by retaining a majority of the board of directors and/or by remaining as CEO) have significantly lower valuations than those where the founder has relinquished control. This is especially true when the startup is three years old or more. Copyright © 2015 John Wiley & Sons, Ltd.

The best of both worlds: Can founder‐CEOs overcome the rich versus king dilemma after IPO?

“…To our knowledge, our study is the first to depict founder‐CEOs' strategies to secure control after IPO as a multi‐stage process with potentially positive net outcomes. Finally, we extend research initiated by Wasserman (, ), which depicts the tradeoff between founder's motivation for (a) financial gains and (b) control as mutually exclusive rich versus king alternatives. For instance, Wasserman () showed that after having a positive effect on firm value during the early stages of startup growth, founders who continue to control their private startups increasingly destroy firm value on average.…”

“…Our study is among the few to investigate the net effects of founder‐CEOs' strategies to maintain control post‐IPO in a multi‐stage process. Finally, and more generally, we challenge previous work suggesting that founders have to sacrifice control to increase firm value by illustrating a context where rich versus king alternatives might occur simultaneously (Wasserman, , ).…”

“…Finally, we extend research initiated by Wasserman (, ), which depicts the tradeoff between founder's motivation for (a) financial gains and (b) control as mutually exclusive rich versus king alternatives. For instance, Wasserman () showed that after having a positive effect on firm value during the early stages of startup growth, founders who continue to control their private startups increasingly destroy firm value on average. By examining other contexts where the rich versus king dilemma applies (founder's control achieved through CEMs rather than board or CEO positions; IPO firms rather than private startups; 5‐year period post‐IPO rather than early rounds of financing), we offer new insights on the conditions under which the rich versus king alternatives might occur simultaneously.…”

Venture Boards: Past Insights, Future Directions, and Transition to Public Firm Boards

“…That is, there is a trade‐off between the resources that board members provide and the power over the venture's direction that must be relinquished to them (Pfeffer & Salancik, ). For example, in a survey‐based study, Wasserman () examines the entrepreneur's ex ante choice between gaining the resources needed for growth versus retaining control (including of the board). He finds that if entrepreneurs choose control, then venture performance suffers.…”

How much do top management teams matter in founder‐led firms?

“…Relying on a sample of more than 2,000 firms that went public from 1997–2013, we examine the performance implications of team structure for founder and nonfounder firms. Overall, our results suggest that founders' tendency to centralize decision‐making (Wasserman, ) might lead them to rely more on their own judgment and less on their team . As a result, founders centralize decisions that enable them to pursue their objectives, but by so doing they sacrifice the performance benefits of the TMT's expertise.…”