The Idea Premium: How Much (Equity) is Your Idea Worth?

How much more equity do you receive if you are the founder who came up with the original idea for your venture?

Last month I posted preliminary analyses (here and here) of how the initial titles/positions adopted by co-founders are affected by which founder had the original idea. In a long-ago post about equity splits, I also suggested that past contributions — including which co-founder(s) had been responsible for the Big Idea — should affect the founding team’s equity split. By how much does being the Idea Person actually affect the equity split?

Preliminary analyses of the responses to our 2007 Information Technology Entrepreneurship and Compensation Survey show that Idea People do receive significantly more equity than do their co-founders. I took 2 cuts at the data.

The first cut was a regression analysis examining the size of the Idea Premium, after controlling for the founders’ backgrounds and other founding-stage differences. Two control variables that had statistically significant effects on the amount of equity received by each founder were as follows:

  • Serial entrepreneur - serial entrepreneurs receive almost 10% more equity than do non-serial entrepreneurs (e.g., 45% of the equity vs. 35% of it).
  • Capital contributed (square-root transformed) — contribute more initial capital, you get more equity, other things being equal.

Also significant (though much less interesting) was the number of founders (negative coefficient; the more founders, the less equity received by each founder). Years of prior work experience and experience in the same industry were not significant.

Of central interest to this post, the variable for Idea Person was highly significant. Across multiple formulations of the model and its variables, the gap between the equity received by Idea People and the equity received by other founders — i.e., the “Idea Premium” — was consistently around 15.0 percentage points (e.g., 50.0% of the equity vs. 35.0% of it) in the IT ventures.

It is important to note that these results may be industry-specific. For instance, I also ran the same analyses on the equity-split data from our 2007 Life Sciences survey. The Idea Premium was only 10.1 percentage points in those Life Sciences ventures. Regarding other variables, the Serial Entrepreneur variable was not significant in the Life Sciences model, and Capital Contributed was of much lower significance. (Let me know if you know of any other attempts to estimate the Idea Premium in either these industries or others!)

Technical notes: The R-squared of the core IT model was .42 and the Prob>F was 0.000. The R-squared of the core Life Sciences model was .28 and the Prob>F was 0.000. In both models, the standard errors were clustered at the company level.

Regarding the second cut at the data: As shown in the chart below, the Idea Premium (the red part of each bar) also varied significantly by the founder’s initial position within the founding team. In particular, the Idea Premium was a lot higher for those who initially became CEOs, Chairmen, and COOs than for the other members of the team.


Some questions:

  1. Any thoughts on the size of the Idea Premium?
  2. Any thoughts on how being the “Idea Person” affected (or didn’t affect) the equity split within your team (or within the teams you’ve observed)?
  3. Were there other factors affecting your split that I should add to the analyses?
16 Comments
  1. Hi Noam,So this is the equity split at the very beginning of the company? (the “initial” split?) I guess I’m not as impressed/surprised that the idea person has a larger portion at the very beginning. I wonder if this “idea premium” lasts at all to later stages of the venture? I guess you have to deal with performance/survival to later stages in that analysis however.Interesting stuff though. I’ve been working on a source of the idea / source of the team paper myself, trying to look at the implications for various measures of performance. I have also been surprised that years of experience seems not to matter much for the eventual performance of the MIT alum startups.

  2. Also, what is meant exactly by having the idea? Is that the idea for the market need, or the solution or both, or the business model of how to get paid for it? I think someone mentioned before, but it is worth repeating, that it would be interesting to be able to disentangle those businesses that were business innovations (some new business model) from those that were technological innovations, from those that were taking a product with the same business model to a new market, perhaps?I wonder if the “idea premium” is higher if it is the person who came up with the technological innovation?Perhaps these three types of businesses have different success rates or performance?

  3. Thanks for the thoughts, Chuck — great to have you involved in the online dialogue!Would love to hear more about the paper you mentioned above. Any thoughts as to why years-of-experience is not significant in your analyses? What factors <>are<> you finding significant?Regarding your first comment/question about the Idea Premium, the purpose of the post was not to establish “<>that<> the idea person has a larger portion at the very beginning” (to take your phrasing) but to take a first crack at providing founders with a benchmark for <>how much<> the Premium is (hence the title of the post). Any thoughts on the size of the Premium?

  4. Chuck:Regarding your second question about the meaning of “idea,” that’s something with which I struggled when we were adding these questions to the IT survey last year. I found it a lot easier to make the question concrete on our parallel Life Sciences survey (given the heightened importance of IP in Life Sciences ventures compared to IT ones), where we were able to ask about which founder was responsible for the IP on which the venture was based.Because of the challenges of defining “idea,” I was half expecting (1.) the IT analyses to not show any significant Idea Premium (given that it was a fuzzier definition of “idea”) yet found it strongly significant anyway, and (2.) the Life Sciences survey to show a bigger Idea Premium than in IT, yet found a smaller one (as described in my original post).Again, would love to get your — and everyone else’s — thoughts on those findings and any others above!

  5. I’m not exactly sure why years of experience (as measured by years from graduating with their highest degree or years since the bachelor’s degree) doesn’t come out as significant on performance. Several reasons could explain it. One is that I don’t have data on every co-founder. It may be that this measure summed over the entire team is what matters (though you would think that on average older individuals would have older cofounders and vice versa - homophily on founding teams). Another is that pure years isn’t what matters but rather some ability measure or the character of the experiences.One interesting early finding along those lines is that it appears that if the individual started their first firm sooner after graduating, then the number of employees and likelihood of being acquired for subsequent firms is higher (even after controlling for the prior founding experience). Not sure what the explanation is, but perhaps these individuals who got started on entrepreneurship early were more motivated or aspiring to create bigger firms, rather than lifestyle firms?But getting back to your paper and the size of the idea premium, do the teams that have higher idea premiums appear to be different on any characteristics than the teams that wind up with lower idea premiums? Just curious. Perhaps the high idea premium teams wind up with more patents or have higher revenues because they are rewarding the idea person for a particularly brilliant insight?

  6. I’m the schlub with no degree, and you’re the MBA/PhD, but:When you say “15.0%”, don’t you really mean “15 percentage points”?

  7. Thanks for the question and the suggestion, Jay. As you could probably tell from my parenthetical clarification about the size of the Idea Premium — i.e., the “<>(e.g., 50.0% of the equity vs. 35.0% of it)<>” note above — I struggled a little with making that part as clear as possible. Writing “15.0% of the full 100% of equity” seemed stilted, so I went with “15.0%” plus the parenthetical clarification, but I like your suggested modification. I’ll incorporate it into the post….

  8. Without the ‘idea’ where is the business…. At point of start up the split depends largely upon of ‘crystal ball’ forecasting of future potential, both in the marketable scale and financial investment Vs profitability.(something which is typically far from accurate in its forecasting)The IP aspect is effectively what drives everything from point of conception - hence global markets with weak or non existent IP protection laws have struggled to develop, maintain or attract innovators, which in turn stunts the economic development of the wider economy.What price creativity - most organizations only truly find out when the creative talent walks out the door, so it’s interesting to see the “idea premium” presented as a % of equity value factor

  9. Noam, this is a great post. Thanks for getting this information out.I've launched a number of startups over the last ten years and in the ones that we've been sophisticated enough to carve out the corporate structure at the very beginning our split of equity has been very similar to what you've mentioned here. All of these companies have been in the IT industry. I don't know where it came from but my partners and I have always used 20% as the generally agreed upon rule of thumb and it has served us well. Although, that number has not differed based on the position that the idea person takes within the company (either intentionally or unintentionally).In our most successful company the idea person became the CTO with his 20% equity advantage which in your research shows to be uncommon (around 6%). Although I should also mention that this person not only had the idea for the software but also wrote 100% of the code that initially took the company to market before the additional partners joined. This could be considered an investment of capital which would then bring it back in line with your findings.I think it's also worth considering the leverage advantage that idea entrepreneurs gain in a startup considering a 15-20% equity advantage. In your example of a common spread being 55% for the idea partner and 35% for the other partner, considering that these startups are always private companies on day one, the idea partner has full control of the company with his majority ownership because in a private company only three ownership amounts really matter (<50%, 50%, >50%). But, as with my primary company, once VC funding arrives the dilution of shareholders pushes the majority owner below 50% assuming he approves the funding round from his position of complete veto power.This is a delicate dance in many startups and a point of contention as the partners must all be on the same page in regard to their expectations of using equity to grow the company. As a corollary when the minority ownership partner is actually building the idea brought to the venture by the majority partner I've seen great concern from the minority equity partner about losing his job and losing everything he's built by being diluted out by the majority partner. Again, simply being on the same page about expectations goes a long way here.This brings me to an idea I've had about matching entrepreneurs on more than just their skills and experience (which I figure they match up based on most frequently since those are more obvious) but instead on the total picture of their expectations on running a startup. If done right I think this could help more startups succeed and jump the hurdles of growth strategy alignment which I've seen tear so many teams apart. From my experience when the team behind the company splits the company always fails.

  10. I was intrigued by the difference in idea premium for Life Sciences versus IT start-ups. I have only anecdotal evidence, but there are a few factors that could make the lower Life Sciences premium less counterintuitive.1. Does the inventor own the IP?Idea origination versus idea ownership. Life Sciences founders usually require significant physical infrastructure to even originate an idea. They're often doing research in a lab owned by an institution at the AHA! moment, and the institution holds the rights to the idea and IP. In IT the physical infrastructure required to develop and validate an idea is far less of a barrier, making more possible for an idea person to get through the idea owning the IP.2. How portable is the idea?The remaining innovation to get an IT idea into the market may be perceived as less portable than a well-documented life sciences discovery. The team may be counting on the ongoing innovative efforts of the IT idea person to get the idea into a commercializable form.Experimental scientists are trained to communicate findings to the broader community as clearly as possible. This is one of the keys to generating recognition and furthering one's career as a Life Scientist (or Chemist, Physicist, etc.) In Life Sciences carefully kept notebooks, detailed patent applications, and research papers create the appearance that the idea has been reduced to a series of recipes. It's human nature to be an inventor in hindsight, and clear documentation of an idea may work against an idea person's perceived ongoing value. Culturally the experimental sciences have always had more of a division between R&D and commercial application than the IT fields. This acculturation may also be in play, making the inventor of a Life Sciences idea appear less relevant to the commercialization process - with some buy-in from the inventor.I have no idea how you would measure factors like these, but they could help explain the unexpected differences between the two areas.-Regina

  11. Thanks for the thoughts, Regina — I really appreciate it! You raise some interesting points. I’ll have to think about whether it’s possible to test some of those factors, whether by using some additional controls (e.g., proxies for cap intensity) or by being able to contrast my IT data with the Life Sciences data (given that a couple of things you mention seem to differ across those industries).

  12. I came to your blog just when I was surfing on this topic. I am happy that I found your blog and information I wanted. I want tot say one thing also that many people have idea as well as equity but they don't have the risk talking power.

  13. Well said! This was a really quality post. In theory I'd like to write like this too - taking time and real effort to make a good article… but what can I say… I procrastinate alot and never seem to get something done.

  14. My cousin recommended this blog and she was totally right keep up the fantastic work
    Freevi Neil Chandran

  15. This is a very useful piece of information! Thank you that you decided to share your knowledge with us!

  16. So a serial developer with capital is the ideal, hence why many people like to invest in an ideas person with a history. It is true that getting your first product to market is the hardest part of all. Enjoyed this post and interesting analysis, thank you.

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