Journal Article

Contracting among Founders

Thomas Hellmann and Veikko Thiele

in The Journal of Law, Economics, and Organization

Volume 31, issue 3, pages 629-661
Published in print August 2015 | ISSN: 8756-6222
Published online February 2015 | e-ISSN: 1465-7341 | DOI: https://dx.doi.org/10.1093/jleo/ewv003
Contracting among Founders

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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)

Journal Article.  13206 words.  Illustrated.

Subjects: Law ; Organizational Theory and Behaviour ; Economics ; Industry Studies

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