Ownership, Control, and the Role of Equity in New Ventures

Abstract

This technical note discusses how a high-potential start-up entrepreneur should use equity in building and growing a new venture. One of the most crucial things for entrepreneurs to understand is equity: Most high-growth ventures grow through equity partnerships, but most new ventures fail because relationships between founding partners and other equity partners become conflicted and impossible to repair. You need to share equity to build an enduring high-growth venture. But sharing equity without understanding how increases the probability for the venture breaking up and failing. The note addresses multiple topics regarding equity, including compensation, profit sharing, decision rights, and cap tables.

Excerpt

UVA-ENT-0226

Sept. 2, 2020

Ownership, Control, and the Role of Equity in New Ventures

One of the most crucial things for a high-potential start-up entrepreneur to understand is how to use equity in building and growing the new venture. There are at least three reasons for this:

1. Most high-growth ventures grow through equity partnerships. That means equity deals get structured and restructured in a variety of ways as the venture evolves into a large, stable corporation—whether public or private.

2. At the same time, most new ventures fail not due to bad management, slow market uptake, or lack of cash, but because relationships between founding partners and other equity partners become conflicted and impossible to repair.