Equity split evolution in entrepreneurial teams: Assessing financial contributions and human capital

Proper equity splits play a vital role in the success of entrepreneurial teams, yet the literature lacks a comprehensive understanding of their evolving nature. This study addresses this gap by analyzing the dynamic and evolutionary process of equity splits using longitudinal data. Through the development of a game-theory model incorporating human-capital signals, we illuminate the impact of these factors. Utilizing data from the Kauffman Firm Survey and employing fixed- and mixed-effects modeling, we uncover significant findings. Initially, financial contributions shape equity splits, but their influence diminishes as hidden human capital gains prominence. Education attainment and work experience have no direct effect, while prior entrepreneurial experience influences the initial year but not subsequent equity resplitting. Our research offers practical insights for making informed equity-split decisions in the early and later stages of ventures. Nonetheless, it's important to note some limitations in our research stemming from the lack of information on individual entrepreneurs' performance within entrepreneurial teams, which could enrich the measurement of hidden human capital.