Startup Fundraising and Equity Split: Do the Number of Investors and Contract Form Matter?

We study equity division between an entrepreneur and one or more potential investors. The investor(s) and the entrepreneur negotiate how much equity (ownership) in the startup the investor(s) should receive in exchange for their investment. The value of that equity is uncertain at the time of the negotiations. We examine how the allocation of startup equity between the entrepreneur and the investors is affected by the following: (1) the number of investors, (2) whether the investors are approached sequentially or simultaneously and (3) whether investors receive downside protection via ``Preferred Stock'', as is sometimes done in practice. Our theoretical results suggest that the entrepreneur would be better off with two investors relative to the single investor case, particularly when bargaining with two investors simultaneously. This prediction is not supported by experimental data which instead suggest that neither the number of investors, nor the timing of the negotiations affect the entrepreneur's profits. In contrast, contractual details matter: across all bargaining regimes, Preferred Stock contracts lead to a 22 to 36\% drop in entrepreneur's profits relative to Common Stock. Additional experiments show that this result persists even as teams gain more practice with contract types, and suggest that it is driven by more aggressive investor bargaining tactics under Preferred Stock contracts.