Ownership Distribution and Innovation in Startups: Key Insights
From the very beginning, founders should consider how to distribute ownership shares in their company. Researchers from the University of Passau, the ZEW – Leibniz Center for European Economic Research in Mannheim, and the IÉSEG School of Management in Paris have found that teams are more innovative when ownership is unevenly distributed.
“We know that founders have a special ability to create something new,” says Prof. Dr. Carolin Häussler, professor of business administration specializing in organization, technology management, and entrepreneurship at the University of Passau. “However, business decisions are not made by one person, but by a team of founders. How the ownership stakes are divided in the founding team plays a crucial role in the decision-making process.”
The Role of Ownership Distribution in Entrepreneurial Innovation
According to the study titled “The Influence of Ownership Distribution of Entrepreneurial Teams and Recombinant Novelty,” development teams are most innovative when company founders co-invent. This happens when the founding member with the highest ownership stake is also involved in R&D. “Our empirical analyses indicate that both the unequal distribution of ownership shares and the direct participation of founders in development teams are associated with increased innovation,” says Laura Körner, PhD candidate and employee at the Professor Dr. Häussler chair.
Key Findings on Innovation and Ownership
Particularly innovative are companies in which the research-active founders hold the largest share of ownership. This is because these individuals have the power to decide on experimental strategies and how to handle setbacks. “The higher the ownership stake of a founder, the better they can make decisions in situations where the potential for value creation is uncertain,” explains Professor Dr. Patrizio Figgi.
The research team shared these findings in a video during the Academy of Management conference in August 2020, which took place virtually due to the COVID-19 pandemic. The Academy of Management is one of the most renowned associations in the field of management research.
Research Project and Methodology
This study was conducted as part of the project “Entrepreneurial Originality Along the Business Lifecycle: Understanding the Attributes of Entrepreneurial Decision-Making” at the University of Passau. The German Research Foundation (DFG) is currently funding the project in its second phase. The research team analyzed data from over 2,000 German startups, focusing on ownership distribution, and compared this data with patent information to determine how founders were involved in their company’s inventions.
Previous Study and Video Award
In a previous study published in the Strategic Entrepreneurship Journal, the team rejected the idea that founders should always hand over the running of the business to professional management once the company reaches a certain size. Researchers from Passau have found that research-active founders can continue to create value within the company. The team presented these results in the form of a video abstract, which was awarded the “Best Video Abstract 2019” by the Strategic Management Society.
In conclusion, the distribution of ownership among founders plays a significant role in the innovation capacity and decision-making within startups. Research-active founders, particularly those holding a larger share of ownership, are better positioned to drive experimental strategies and handle uncertainty, leading to more innovative outcomes.