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Contracting among Founders

Author

Listed:
  • Thomas Hellmann
  • Veikko Thiele

Abstract

This article develops a theory of contracting among founders of a new firm. It asks at what stage founders agree to commit to each other, how they structure optimal founder contracts, and how this affects team formation, ownership, incentives, and performance. The article derives a trade-off between upfront contracting, which can result in teams with ineffective founders, versus delayed contracting, which can enable some founders to appropriate ideas and start their own firms. Delayed contracting becomes more attractive when there are significant doubts about the skills of founders. We show that contingent contracts with vesting of shares may be used to mitigate inefficiencies in the team formation process. We also show that laws that provide protection to implied partnerships may have the unintended effect of encouraging more formal contracting. (JEL D82, D86, K12, L26)

Suggested Citation

  • Thomas Hellmann & Veikko Thiele, 2015. "Contracting among Founders," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 31(3), pages 629-661.
    • Handle: RePEc:oup:jleorg:v:31:y:2015:i:3:p:629-661.
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    File URL: http://hdl.handle.net/10.1093/jleo/ewv003
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    Citations

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    Cited by:

    1. Holger Patzelt & Rebecca Preller & Nicola Breugst, 2021. "Understanding the Life Cycles of Entrepreneurial Teams and Their Ventures: An Agenda for Future Research," Entrepreneurship Theory and Practice, , vol. 45(5), pages 1119-1153, September.
    2. Signori, Andrea & Vismara, Silvio, 2018. "Does success bring success? The post-offering lives of equity-crowdfunded firms," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 575-591.
    3. Thomas Hellmann & Noam Wasserman, 2017. "The First Deal: The Division of Founder Equity in New Ventures," Management Science, INFORMS, vol. 63(8), pages 2647-2666, August.
    4. Thomas F. Hellmann & Veikko Thiele, 2012. "A Theory of the Firm based on Partner Displacement," NBER Working Papers 18495, National Bureau of Economic Research, Inc.
    5. Vereshchagina, Galina, 2019. "The role of individual financial contributions in the formation of entrepreneurial teams," European Economic Review, Elsevier, vol. 113(C), pages 173-193.
    6. Tiantian Yang & Jiayi Bao & Howard Aldrich, 2020. "The Paradox of Resource Provision in Entrepreneurial Teams: Between Self-Interest and the Collective Enterprise," Organization Science, INFORMS, vol. 31(6), pages 1336-1358, November.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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