First Look

March 18, 2014

The Division Of Founder Equity

At some point, startup entrepreneurs face a difficult decision: how to split up founder shares. Should they be split equally or do some founders deserve more than others? A new working paper authored by Thomas F. Hellmann and Noam Wasserman, ''The First Deal,'' reveals how share divisions were made by 1,476 founders in 511 ventures. The work may prove financially beneficial to stronger founders by putting numbers on how much cash and equity they can leave behind by agreeing to an equal division.

Who Is Patenting Renewable Energy?

Research by Ramana Nanda, Ken Younge, and Lee Fleming explores where early bets are being made in renewable energy technology. Their paper for a forthcoming book details who is doing most of the patenting (large energy firms), pinpoints where much of the more innovative work is concentrated (VC-backed startups), and why the flow of venture capital has slowed in recent years. Their book chapter is titled, ''Innovation and Entrepreneurship in Renewable Energy.''

A Vc Startup Makes It To The Top

The venture capital firm Andreessen Horowitz, founded by Netscape founder Marc Andreessen and entrepreneur Ben Horowitz, has taken a unique approach to the funding business. A case study by Thomas R. Eisenmann and Liz Kind looks at the firm's history and novel organization strategy, and asks readers to think about a growth strategy for the next five years.

— Sean Silverthorne


  • August 2013
  • Social Science & Medicine

Who Donates Their Bodies to Science? The Combined Role of Gender and Migration Status Among California Whole-body Donors

By: Asad, Asad L., Michel Anteby, and Filiz Garip

Abstract—The number of human cadavers available for medical research and training, as well as organ transplantation, is limited. Researchers disagree about how to increase the number of whole-body bequeathals, citing a shortage of donations from the one group perceived as most likely to donate from attitudinal survey data-educated white males over 65. This focus on survey data, however, suffers from two main limitations: First, it reveals little about individuals' actual registration or donation behavior. Second, past studies' reliance on average survey measures may have concealed variation within the donor population. To address these shortcomings, we employ cluster analysis on all whole-body donors' data from the Universities of California at Davis, Irvine, Los Angeles, and San Francisco. Two donor groups emerge from the analyses: One is made of slightly younger, educated, married individuals, an overwhelming portion of whom are U.S. born and have U.S.-born parents, while the second includes mostly older, separated women with some college education, a relatively higher share of whom are foreign born and have foreign-born parents. Our results demonstrate the presence of additional donor groups within and beyond the group of educated and elderly white males previously assumed to be most likely to donate. More broadly, our results suggest how the intersectional nature of donors' demographics, in particular, gender and migration status, shapes the configuration of the donor pool, signaling new ways to possibly increase donations.

Publisher's link:

  • August 2013
  • The Changing Frontier: Rethinking Science and Innovation Policy

Innovation and Entrepreneurship in Renewable Energy

By: Nanda, Ramana, Ken Younge, and Lee Fleming

Abstract—We document three facts related to innovation and entrepreneurship in renewable energy. Using data from the U.S. Patent and Trademark Office, we first show that patenting in renewable energy remains highly concentrated in a few large energy firms. In 2009, the top 20 firms accounted for over 40% of renewable energy patents in our data. Second, we compare patenting by venture‐backed startups and incumbent firms. Using a variety of measures, we find that VC‐backed startups are engaged in more novel and more highly cited innovations compared to incumbent firms. Incumbent firms also have a higher share of patents that are completely un‐cited or self-cited, suggesting that incumbents are more likely to engage in incremental innovation compared to VC-backed startups. Third, we document a rising share of patenting by startups that coincided with the surge in venture capital finance for renewable energy technologies in the early 2000s. We also point to structural factors about renewable energy that have caused the availability of venture capital finance for renewable energy to fall dramatically in recent years, with potential implications for the rate and trajectory of innovation in this sector.

Publisher's link:


Working Papers

An Analysis of Firms' Self-Reported Anticorruption Efforts

By: Healy, Paul M., and George Serafeim

Abstract—We use Transparency International's ratings of self-reported anticorruption efforts for 480 corporations to analyze factors underlying the ratings. Our tests examine whether these forms of disclosure reflect firms' real efforts to combat corruption or are cheap talk. We find that the ratings are related to enforcement and monitoring, country and industry corruption risk, and governance variables. Specifically, firms with high anticorruption ratings are domiciled in countries with low corruption risk ratings and strong anticorruption enforcement, operate in high corruption risk industries, have recently faced a corruption enforcement action, employ a Big Four audit firm, and have a higher percentage of independent directors. Controlling for these effects and other determinants, we find that firms with lower residual ratings have relatively higher subsequent media allegations of corruption. They also report higher future sales growth and show a negative relation between profitability change and sales growth in high corruption geographic segments. In contrast, there is no relation between residual anticorruption ratings, sales growth, and changes in profitability in low corruption geographic segments. The net effect on valuation from sales growth and changes in profitability is close to zero. Given this evidence, we conclude that, on average, firms' self-reported anticorruption efforts signal real efforts to combat corruption and are not merely cheap talk.

Download working paper:

The First Deal: The Division of Founder Equity in New Ventures

By: Hellmann, Thomas F., and Noam Wasserman

Abstract—This paper examines the division of founder shares in entrepreneurial ventures, focusing on the decision of whether or not to divide the shares equally among all founders. To motivate the empirical analysis we develop a simple theory of costly bargaining, where founders trade off the simplicity of accepting an equal split with the costs of negotiating a differentiated allocation of founder equity. We test the predictions of the theory on a proprietary dataset comprised of 1,476 founders in 511 entrepreneurial ventures. The empirical analysis consists of three main steps. First we consider determinants of equal splitting. We identify three founder characteristics-idea generation, prior entrepreneurial experience, and founder capital contributions-regarding which greater team heterogeneity reduces the likelihood of equal splitting. Second, we show that these same founder characteristics also significantly affect the share premium in teams that split the equity unequally. Third, we show that equal splitting is associated with lower pre-money valuations in first financing rounds. Further econometric tests suggest that, as predicted by the theory, this effect is driven by unobservable heterogeneity, and it is more pronounced in teams that make quick decisions about founder share allocations. In addition we perform some counterfactual calculations that estimate the amount of money "left on the table" by stronger founders who agree to an equal split. We estimate that the value at stake is approximately 10% of the firm equity, 25% of the average founder stake, or $450K in net present value.

Download working paper:

Abstract—This working paper examines the role of entrepreneurs in the municipal solid waste industry in industrialized central and northern Europe from the late nineteenth century to the 1940s. It explores the emergence of numerous German, Danish, and other European entrepreneurial firms explicitly devoted to making a profitable business out of conserving and returning valuable resources to productive use, while maintaining public sanitation and in many cases offering nascent environmental protections. These ventures were qualitatively different from both earlier smaller private waste traders, and the later garbage agglomerates, and have been neglected in an era that historians have treated as a period of municipalization. These entrepreneurs sometimes had strikingly modern views of environmental challenges and the need to overcome them. They initiated processes for sorting and recycling waste materials that are still employed today. Yet it proved difficult to combine making profits and achieving social value in accordance with the "shared value" model of today. As providers of public goods such as health and sanitation and a cleaner environment, the entrepreneurs were often unable to capture sufficient profits to sustain businesses. Recycled-goods markets were volatile. There was also a tension between the constant waste stream on the collection side and a seasonal/cyclical demand for recycled products. The frequent failure of these businesses helps to explain why in more recent decades private waste companies have been associated with late entry into recycling, often trailing municipal governments and non-profit entities.

Download working paper:

Governing Misvalued Firms

By: Kadyrzhanova, Dalida, and Matthew Rhodes-Kropf

Abstract—Equity overvaluation is thought to create the potential for managerial misbehavior, while monitoring and corporate governance curb misbehavior. We combine these two insights from the literatures on misvaluation and governance to ask, when does governance matter? Examining firms with standard long-run measures of corporate governance as they are shocked by plausible misvaluation, we provide consistent evidence that firm performance is impacted by governance when firms become overvalued-overvaluation causes weaker performance in poorly governed firms. Our findings imply that firm oversight is important during market booms, just when stock prices suggest all is well.

Download working paper:

Visualizing and Measuring Software Portfolio Architectures: A Flexibility Analysis

By: Lagerstrom, Robert, Carliss Y. Baldwin, Alan MacCormack, and David Dreyfus

Abstract—In this paper, we test a method for visualizing and measuring software portfolio architectures and use our measures to predict the costs of architectural change. Our data is drawn from a biopharmaceutical company, comprising 407 architectural components with 1,157 dependencies between them. We show that the architecture of this system can be classified as a "core-periphery" system, meaning it contains a single large dominant cluster of interconnected components (the "Core") representing 32% of the system. We find that the classification of software applications within this architecture, as being either Core or Peripheral, is a significant predictor of the costs of architectural change. Using OLS regression models, we show that this measure has greater predictive power than prior measures of coupling used in the literature.

Download working paper:

Speaking of Corporate Social Responsibility

By: Liang, Hao, Christopher Marquis, Luc Renneboog, and Sunny Li Sun

Abstract—We argue that the language spoken by corporate decision makers influences their firms' social responsibility and sustainability practices. Linguists suggest that obligatory future-time-reference (FTR) in a language reduces the psychological importance of the future. Prior research has shown that speakers of strong FTR languages (such as English, French, and Spanish) exhibit less future-oriented behavior (Chen, 2013). Yet, research has not established how this mechanism may affect the future-oriented activities of corporations. We theorize that companies with strong-FTR languages as their official/working language would have less of a future orientation and so perform worse in future-oriented activities such as corporate social responsibility (CSR) compared to those in weak-FTR language environments. Examining thousands of global companies across 59 countries from 1999 to 2011, we find support for our theory and further that the negative association between FTR and CSR performance is weaker for firms that have greater exposure to diverse global languages as a result of (a) being headquartered in countries with a higher degree of globalization, (b) having a higher degree of internationalization, and (c) having a CEO with more international experience. Our results suggest that language use by corporations is a key cultural variable that is a strong predictor of CSR and sustainability.

Download working paper:

Financing Risk and Innovation

By: Nanda, Ramana, and Matthew Rhodes-Kropf

Abstract—We provide a model of investment into new ventures that demonstrates why some places, times, and industries should be associated with a greater degree of experimentation by investors. Investors respond to financing risk―a forecast of limited future funding―by modifying their focus to finance less innovative firms. Potential shocks to the supply of capital create the need for increased upfront financing, but this protection lowers the real option value of the new venture. In equilibrium, financing risk disproportionately impacts innovative ventures with the greatest real option value. We propose that extremely novel technologies may need "hot" financial markets to get through the initial period of discovery or diffusion.

Download working paper:


Cases & Course Materials

  • Harvard Business School Case 114-049

Tech Mahindra and the Acquisition of Satyam Computers (A)

Set in 2008, the case details Tech Mahindra, an information technology (IT) company within the Mahindra Group, an Indian multi-industry company with a diverse stable of businesses including automotives, farm equipment, and financial services and its decision to acquire controlling stake in Satyam Computer Services Ltd. (Satyam), a troubled Indian IT company managed since January 2009 by a six-member government-appointed caretaker board. Anand Mahindra, chairman and managing director of the Mahindra Group, saw the acquisition of Satyam as a strategic opportunity to move to the next level of growth. The acquisition would allow the Group to diversify across verticals, customers, and geographies, market a wide range of services to Satyam's strong customer base, and capitalize on common support systems in order to reduce operating costs and secure operational synergies. His brief to Vineet Nayyar-the vice chairman and managing director of Tech Mahindra and the vice chairman of Satyam-and C.P Gurnani-the CEO of Mahindra Satyam-was based on a set of clear principles: rectify the issues related to corporate governance, ensure an environment of trust where ethical conduct was valued, manage reputation risks by meeting customers and demonstrating the Mahindra Group's commitment, and restore faith within customers through newfound business models of delivery and engagements. As Nayyar reflected on Anand Mahindra's words, he wondered what series of business decisions he would have to make in order to retain the good elements, throw out the bad pieces, regain trust, and trigger change within the newly anointed Mahindra Satyam.

Purchase this case:

  • Harvard Business School Case 814-060

Andreessen Horowitz

Andreessen Horowitz (a16z), a venture capital firm launched in 2009, has quickly broken into the VC industry's top ranks in terms of its ability to invest in Silicon Valley's most promising startups. The case recounts the firm's history, describes its co-founders' motivations and their strategy for disrupting an industry in the midst of dramatic structural change, and asks whether a16z's success to date has been due to its novel organization structure. a16z's 22 investment professionals are supported by 43 recruiting and marketing specialists-an "operating team" that is an order of magnitude larger than that of any other VC firm. Furthermore, the operating team aims to not only assist a16z portfolio companies, but also to be broadly helpful to all parties in the Silicon Valley ecosystem, including search firms, journalists, PR agencies, and Fortune 500 executives. The bet-by providing "no-strings-attached" help to ecosystem partners, the partners might someday reciprocate by steering founders seeking funding to a16z. The case closes by asking whether a16z should seek to double its scale over the next years.

Purchase this case:

  • Harvard Business School Case 314-067

'These People Are Fiduciaries...'

The fiduciary duties of loyalty and care, the corporate opportunity doctrine, and the business judgment rule are introduced in the context of three vignettes drawn from decided cases that explore the following: a classic test of loyalty when one partner elects to take advantage of an opportunity the partnership may also be able to pursue (Meinhard v. Salmon); the care and procedure directors should employ when approving a merger or sale of the company (Smith v. Van Gorkum); and the board's role and process in hiring, firing, and severance decisions (Ovitz at Disney).

Purchase this case:

  • Harvard Business School Case 514-024

Coca-Cola: Liquid and Linked

Coca-Cola is considering which of several global marketing/promotional efforts to bring to the United States. Each has proven successful in other parts of the world but for varying reasons. All represent efforts outside of the industry's normal advertising-based approach to marketing.

Purchase this case:

  • Harvard Business School Case 310-066

Phreesia: The Patient Check-In Company

Phreesia is successful with a tablet for patients to sign in at the doctor's office that can also be used for billing. But what is the next step? And is their ad-based revenue model sustainable?

Purchase this case:

  • Harvard Business School Case 814-045

Abraaj Capital and the Karachi Electric Supply Company (B)

Two years have passed, and Tabish Gauhar must decide if now is the right time to exit KESC.

Purchase this case:

  • Harvard Business School Case 314-090

Legislative Choices for U.S. Corporate Tax Reform

This case asks students to wear the hat of a policymaker to explore the politically charged issues around corporate tax reform in the U.S.

Purchase this case:

  • Harvard Business School Case 914-020

Paul Levy: Confronting a 'Corporate Campaign'

Hospital CEO Paul Levy confronts an SEIU unionization drive via a "corporate campaign" aimed at undercutting the hospital's relationships with key internal and external constituencies. Having shepherded one of Boston's top teaching hospitals much of the way through a painful turnaround, but with the hospital still in a fragile financial condition, Levy must formulate a strategy and tactics to deal with the impending initiative by the SEIU, the fastest growing union in the United States with 2.1 million members and a huge organizing budget. The union will likely seek the hospital's agreement to a "neutrality agreement" under which, unlike traditional union processes, management would effectively be silenced during the organizing process. Levy is concerned that the hospital's strategy of innovation and flexibility would be imperiled by an SEIU-unionized workforce.

Purchase this case:

  • Harvard Business School Case 714-474

Aldi: The Dark Horse Discounter

No abstract available.

Purchase this case:

  • Harvard Business School Case 213-049

S&P Indices and the Indexing Business in 2012

In June 2012, Standard & Poor's Indices is finalizing a deal with the CME Group, the largest global exchange for futures and options and majority owner of Dow Jones Indexes, to combine their respective indices business into a new joint venture called S&P Dow Jones Indices. This case discusses the index provider business model through the lenses of this transaction: sources of revenue and profitability, business valuation, uses of indexes in the money management industry, types of indexes, intellectual property protection issues, and competition, marketing, and growth opportunities. The case puts special emphasis on the strategic drivers for business consolidation and combination in an environment of increased competition, trends toward self-indexation, and growth of indexing at a global scale.

Purchase this case: