Abstract

The majority of new ventures are started by a group of entrepreneurs, rather than a lone individual. Prior research suggests that entrepreneurs use ownership distribution and equity to attract quality team members and form partnerships. Though scholars have contended that equity distribution takes place at a later stage in the new venture process when conditions are more certain and objective performance assessments are possible, a large percentage of new ventures assign ownership at the formation of the new venture when conditions are most uncertain. Additionally, despite possible negative outcomes of unequal pay dispersion, a considerable portion of lead founders choose to disperse the new venture’s ownership shares unequally among members of the founding team. Equal distribution of ownership has been reasonably examined but characteristics driving unequal distribution of ownership have received only a cursory explanation. We offer a framework describing the dilemma of equity distribution and present and test specific characteristics that impact a lead entrepreneur’s willingness to share his or her equity stake. We hypothesize that psychological ownership will negatively impact a founder’s willingness to distribute ownership shares evenly. We also predict that lead entrepreneurs distribute equity more evenly when perceived environmental uncertainty is high and when the founding partners are ethnically similar to the lead entrepreneur.

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