Factors affecting the equity-split decisions at business start-up in South Africa

Abstract

The issue of the division of equity is one that founders of joint ventures inevitably face during the start-up phase of business development. Whilst this is an issue of great importance in that it shapes the capital structure of the business (Roberts and Zender, 2008) and impacts on the future productivity of founder members (Holstrom, 1982), it is an area that has received little systematic attention in academic literature. Hellman and Wasserman (2011) conducted a large scale study of equity splits in start-up’s and noted that the three factors of (1) the value of the idea, (2) past entrepreneurial experience and (3) capital contribution played a significant role in determining the division of equity. This study employs a qualitative research methodology to investigate the process of equity negotiation with the aim of identifying further factors that may guide decisions in equity negotiation. The key findings of the research are that the dynamics of the interpersonal relationships that exist between founder members appear to influence equity negotiations, in that preserving goodwill in these relationships was a factor that motivated founder members to lean towards equal equity splits. The two phenomena that are associated with a need to preserve goodwill within the relationship are the existence of a relationship prior to entering into business, and the business venture being based on a shared idea.Copyright