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Negotiating equity share and management control of the entrepreneurial new venture

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  • Evan J. Douglas
  • Martin Carlsson-Wall
  • Tomas Hjelström

Abstract

The valuation of entrepreneurial start-ups for the purpose of equity allocation to business angel investors is an enduring point of discord between the contracting parties. Lack of information and lack of trust, plus the asymmetry of both information and trust between the parties, typically cause the investor to apply a higher risk premium and argue for a larger share of the firm's equity than the entrepreneur deems reasonable. Recent literature on interpersonal trust and the inclusion of management controls is incorporated into a conceptual model to examine the potential for a win-win situation based on information provision and trust building during the negotiation process. Although the entrepreneur and investor may begin with widely divergent ambit claims, hearing and discussing the other's perspectives will redress information asymmetries, build mutual trust and produce a win-win situation for both parties.

Suggested Citation

  • Evan J. Douglas & Martin Carlsson-Wall & Tomas Hjelström, 2014. "Negotiating equity share and management control of the entrepreneurial new venture," Venture Capital, Taylor & Francis Journals, vol. 16(4), pages 287-307, October.
    • Handle: RePEc:taf:veecee:v:16:y:2014:i:4:p:287-307
    DOI: 10.1080/13691066.2014.970334
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    Cited by:

    1. Lavanchy, Maude & Reichert, Patrick & Joshi, Amit, 2022. "Blood in the water: An abductive approach to startup valuation on ABC's Shark Tank," Journal of Business Venturing Insights, Elsevier, vol. 17(C).
    2. Elisabeth S.C. Berger & Andreas Köhn, 2020. "Exploring the differences in early-stage start-up valuation across countries: an institutional perspective," International Entrepreneurship and Management Journal, Springer, vol. 16(1), pages 327-344, March.
    3. Andreas Köhn, 2018. "The determinants of startup valuation in the venture capital context: a systematic review and avenues for future research," Management Review Quarterly, Springer, vol. 68(1), pages 3-36, February.
    4. Caroline Tarillon & Han Yu & Ludivine Adla & Elodie Manthé & Geoffroy Enjolras, 2023. "Similarity is not everything: the influence of personal characteristics of entrepreneurs and investors on their fit," International Entrepreneurship and Management Journal, Springer, vol. 19(2), pages 709-732, June.
    5. Adil El Fakir & Richard Fairchild & Mohamed Tkiouat & Abderrahim Taamouti, 2023. "A bargaining model for PLS entrepreneurial financing: A game theoretic model using agent‐based simulation," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 1228-1241, April.

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