Tech Transfer eNews Blog

Study casts doubt on value of incentive-based contracts for early start-up employees


By Jesse Schwartz
Published: September 11th, 2019

A new study suggests that many start-ups may be taking the wrong approach to success through incentive-based contracts for founders and early employees. According to the research, it may be less about incentives and more about identifying the right people to incentivize.

Authors Evgeny Kagan of Johns Hopkins University and Stephen Leider and William Lovejoy, both of the University of Michigan, stress that some individuals deserve incentives more and are motivated by them more than others. The authors refer to these individuals as “high-performing” team members, and they encourage start-up founders to identify them before handing out incentives.

“Equally split contracts can encourage free-riding behavior,” says Kagan. “They are embraced by the least desirable collaborator types who protect themselves by not taking risks but still sharing equally in the proceeds.”

The authors suggest that founders should delay contracting in order to better evaluate the personalities of their team members. They can then use their observations to decide whether a strong incentive-based or a simple, equal split contract is appropriate. The findings encourage investors to avoid start-ups with equal ownership splits between founders, especially when those contracts have been chosen early in the collaboration.

The study, “Equity Contracts and Incentive Design in Startup Teams,” is being published in the upcoming issue of the journal Management Science.

Source: Science Daily

Posted under: Tech Transfer e-News

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