HKU Business School, The U. of Hong Kong, Hong Kong
Equity split is one of the most important decisions that entrepreneurial ventures have to make in order to align individual efforts with contributions among the cofounders. While the prior literature has examined the impact of equity division on individual cofounder’s effort to contribute ex post, we know little about how the initial sources of contribution shape equity division decision ex ante. Yet, it is well documented that knowledge contribution through ideas, technologies, and information is critical for the creation and growth of high-tech ventures. At the same time, knowledge is hard to evaluate and contracts involving the evaluation of knowledge is subject to the hazard of renegotiation. Drawing insights from the behavioral theory of entrepreneurship, I argue that knowledge contribution, relative to other (generally more tangible) forms of contribution such as financial capital, real estate, and machinery, is associated with both a higher level of initial equity share and a higher level of equity dilution over the course of venture development. I further investigate the moderating role of venture capital (VC) investors in equity split adjustment and find evidence that VCs featured with different institutional logics (i.e., state affiliated VCs vs. private VCs) vary in their role of facilitating this adjustment. A hand-collected dataset from China that uniquely helps identify initial knowledge contribution among cofounders provides supportive evidence to my hypotheses.