Passau start-up study: Unequal distribution of ownership in the founding team leads to more innovation
This is the conclusion reached by a research team from the University of Passau and the IÉSEG School of Management in a study conducted as part of a German Research Foundation (DFG) project.
From the very beginning, founders should think carefully about how to divide ownership of their company. Researchers at the University of Passau, the ZEW - Leibniz-Centre for European Economic Research in Mannheim, and the IÉSEG School of Management in Paris, France, have found that teams are more innovative when the ownership shares are unequally distributed. This is particularly true when the founding member with the highest ownership share is also involved in the research and development activities.
‘We know that founders have a special ability to create novelty’, says Professor Carolin Häussler, holder of the Chair of Organisation, Technology Management, and Entrepreneurship at the University of Passau. ‘Often, however, entrepreneurial decisions are not made by one individual, but by a team of founders. How ownership in a start-up is divided between founders will have a major influence on how founding teams make these decisions.’
In the study ‘The Influence of Entrepreneurial Teams' Ownership Distribution and Recombinatory Novelty’, the research team concludes that teams are particularly innovative when company founders are involved in the invention activities. ‘Our empirical analysis suggests that both the unequal ownership split and the direct participation of founders in inventor teams are associated with higher novelty’, says Laura Körner, doctoral candidate and research associate at the chair of Professor Häussler.
Particularly innovative are those companies in which the research-active founders have the largest share of ownership. This is because these people are empowered to decide on experimental strategies and how to deal with setbacks. ‘The more one of the founders is empowered by a higher ownership share, the more that founder can take decisions in situations, where the potential for value creation is highly uncertain’, explains Dr Patrick Figge, also a member of Professor Häussler’s chair.
In August 2020, the research team presented the findings in a video at the Academy of Management conference, which was held virtually this year due to COVID-19. In the video, the researchers presented themselves to an international audience in the field of management research against the backdrop of the baroque silhouette of Passau. The Academy of Management is one of the most renowned associations in this field.
The study was conducted as part of the project ‘The originality of entrepreneurs along the life cycle of firms: Understanding the attributes of entrepreneurial decision making’ at the University of Passau, which the German Research Foundation (DFG) is funding in its second phase. The research team evaluated data from over 2000 German start-ups with regard to the distribution of ownership shares. The research team compared these data with patent data to see whether and how founders were involved in the companies' inventions.
Award for video of the previous study
In a previous study, which was published in the prominent Strategic Entrepreneurship Journal, the team already disproved that it would be better for founders to hand over the management of the company to a professional management team once it has reached a certain size. The Passau researchers concluded that founders who are actively involved in research can very well continue to create value in the company. The team also presented these findings in the form of a video abstract. The renowned Strategic Management Society awarded the video as ‘Best Video Abstract 2019’.