The throne vs. the kingdom: Founder control and value creation in startups
| Date | 01 February 2017 |
| Published date | 01 February 2017 |
| DOI | http://doi.org/10.1002/smj.2478 |
| Author | Noam Wasserman |
Strategic Management Journal
Strat. Mgmt. J.,38: 255–277 (2017)
Published online EarlyView 8 January 2016 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2478
Received 17 January 2014;Final revisionreceived 9 October 2015
THE THRONE VS. THE KINGDOM: FOUNDER
CONTROL AND VALUE CREATION IN STARTUPS
NOAM WASSERMAN*
Harvard Business School, Boston, MA, U.S.A.
University of Southern California, Los Angeles, California, U.S.A.
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 retaincontrol
of decision making. I develop hypotheses about this tradeoff and test the hypotheses on a unique
dataset of 6,130 American startups. I nd that startups in which the founder is still in control
of the board of directors and/or the CEO position are signicantly 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) reducesthe pre-money valuation of the startup by
17.1– 22.0 percent.
Managerial summary: A founder’s vision and capabilities arekey 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 signicantly 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.
INTRODUCTION
In a classic study of entrepreneurial growth,
Eisenhardt and Schoonhoven (1990: 504) pose the
question: “Some young rms become resounding
successes. …Others languish as small rms. …
Why do these differences in organizational growth
arise?” I extend previous work by analyzing a factor
that should have a powerful effect on whether value
is created or the organization languishes: the degree
to which the founder maintains control. I explore
the possibility that the startup’s resource needs
Keywords: entrepreneurship; CEO leadership; value cre-
ation; control and autonomy; managerial tradeoffs
*Correspondence to: Noam Wasserman, 150 Eliot Street, Chest-
nut Hill, MA. E-mail: nwasserman@mba1999.hbs.edu
Copyright © 2015 John Wiley & Sons, Ltd.
drive a wedge between the growth of the startup
and the founder’s ability to maintain control— a
so-called “control dilemma.” Multiple steps along
the entrepreneurial journey pose a tradeoff between
attracting the resources required to build company
value and being able to retain control of decision
making.
The key resources founders can attract include
human, social, and nancial capital (Sapienza,
Korsgaard, et al., 2003) provided by cofounders,
hires, and investors. However, attracting those
resources often comes at the cost of ownership
stakes and decision-making control. I develop
hypotheses about this tradeoff, and test the
hypotheses on a unique dataset of 6,130 American
startups collected between 2005 and 2012. The
analyses tap all respondents in the dataset and use
256 N. Wasserman
xed-effects with repeat respondents in order to
control for unobserved time-invariant company
characteristics.
This study adds insights to several literatures.
Within the entrepreneurship literature, concep-
tual studies (e.g., Amit et al., 2000; Evans and
Jovanovic, 1989) have speculated that the desires
for autonomy and control may affect the ini-
tial decision to launch a company, but have not
broadened to include a fuller picture of company
evolution. Likewise, analyses of entrepreneurial
capital constraints have used bequests (e.g.,
Blanchower and Oswald, 1998) and lottery win-
nings (e.g., Lindh and Ohlsson, 1998) to examine
the propensity to become an entrepreneur. The
entrepreneurial-nance literature (e.g., Hamilton,
2000; Moskowitz and Vissing-Jorgensen,2002) has
suggested that, on average, entrepreneurs receive
fewer pecuniary benets than they might receive
in paid employment, but has not examined whether
this is true for some types of entrepreneurs but
not for others, and has not examined empirically
whether those benets might be affected by the
degree of control retained by the founders.
In larger corporations, the economics literature
has examined the private benets of control in
the securities of public companies (e.g., Barclay
and Holderness, 1989; Grossman and Hart, 1988;
Lease, McConnell, and Mikkelson, 1983), but has
not explored whether the private benets of con-
trol extend to entrepreneurial decisions and out-
comes. The corporate-nance literature on sustain-
able growth rates (e.g., Higgins, 1977, 1998) has
highlighted the tension between growth objectives
and nancial policies, but its models ignore control
considerations and it assumes stability in nancial
policies, reducing its applicability to our tension
and to the types of companies examined here. In
contrast to studies that focus on organizational rela-
tionships with external resource providers— such
as corporate investment relationships, alliances, or
joint ventures (e.g., Gulati and Sytch, 2007; Gulati
and Wang, 2003; Katila, Rosenberger, and Eisen-
hardt, 2008; Ozcan and Eisenhardt, 2009)— this
study focuses on resource providers who become
part of the internal startup team, such as cofounders,
hires, and investors who join the board of directors.
Finally, resource-dependence theory has focused
on the ways in which organizational uncertainty is
reduced by attracting resources (Pfeffer and Salan-
cik, 1978), but has largely neglected how another
important uncertainty— “control uncertainty,” or
whether company leaders will lose control of deci-
sion making— may be heightened by the attraction
of resources.
Thus, the current study develops the theoretical
grounding for this control dilemma. I empirically
test the hypothesized tradeoff using a large, unique
dataset that includes direct measures of founder
control. I also delve into alternative hypotheses and
contingencies. The analyses use xed effects to con-
trol for unobserved time-invariant characteristics of
the startups, and test the hypotheses on different
metrics of value creation. The analyses show that,
ceteris paribus, startups in which the founder is still
in control of the board of directors and/or the CEO
position are signicantly less valuable than those in
which the founder has given up a level of control.
On average, each additional level of founder control
(i.e., keeping control of the CEO position or board)
reduces the pre-money valuation of the startup
by 17.1– 22.0 percent.1The tradeoff is particularly
strong in startups that are three years old or more.
Because the analyses include a variety of resource
providers (cofounders vs. hires vs. investors), I
am also able to examine how different types of
resources can differ in their impacts on the value
that is built and on the founder’sretention of control.
THEORY AND HYPOTHESES
In 1997, when rst-time founder Lew Cirne
founded Wily Technology, an enterprise-
application management company, he faced a
wide variety of decisions about how to build
his company. Over the next twoyears, he hired
experienced executives, built a team of fty
employees, raised two large rounds of nancing
from top venture capitalists (VCs), and gave up
three of ve seats on the board of directors to
those investors. When it came time to raise the
next round of nancing, the board decided that
Wily needed a CEO who had stronger business
skills than Cirne, who had a technical background
(Wasserman and McCance, 2005). Their choice,
“professional CEO” Richard Williams, replaced
Cirne as CEO. For his part, Cirne was left with
1As described in “Data and Methods,” one of my two core metrics
of company value is the pre-money valuation of the company at
the most recent round of nancing (e.g., Gompers et al., 2010;
Hsu, 2004), calculated as the price per share in the nancing round
times the number of shares outstanding prior to the round.
Copyright © 2015 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 255–277 (2017)
DOI: 10.1002/smj
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