Do Founders Control Start-Up Firms that Go Public?

Do Founders Control Start-Up Firms that Go Public?

Jesse Fried, Brian Broughman

Series number :

Serial Number: 
405/2018

Date posted :

May 14 2018

Last revised :

May 14 2018
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Keywords

  • Startups • 
  • Founders • 
  • venture capital • 
  • VC • 
  • IPOs • 
  • stock markets • 
  • innovation • 
  • Entrepreneurs • 
  • venture capitalists • 
  • Corporate governance • 
  • CEO • 
  • shareholders • 
  • NASDAQ

Startup founders, who generally must cede control to obtain VC financing, are widely believed to regain control in the event of an IPO, à la Facebook’s Mark Zuckerberg. Indeed, the premise that founders expect to be able to reacquire control if there is an IPO underlies the leading finance theory for why venture capital cannot thrive without a robust stock market.

But little is known about how frequently founders regain control via IPO. Using a sample of over 18,000 VC-backed firms, we show that founders generally do not reacquire control via IPO. In almost 60% of firms that go public, the founder is no longer CEO at IPO. In firms with a founder-CEO right after IPO, founders generally lack substantial voting power; 50% are no longer CEO of a public firm within three years. Zuckerberg is not the norm. As of initial VC financing, the likelihood that a founder takes her firm public and retains the CEO position and voting control for three years is about 0.4%. Our results shed light on how control evolves in U.S. startups, and cast doubt on the plausibility of the control-reacquisition theory linking stock and VC markets.
 

Authors

Real name:
Brian Broughman