Contents07 sections
Seed round, second meeting. The founders have a technology from a corporate lab, an exclusive license and first customer conversations. The investor flips to the cap table. Founders 55 percent, corporate 35 percent, the rest spread out.
“Is the corporate following on in the next round?”
“No. The corporate contributed the technology. No further money is planned.”
“Then we talk about that stake first. And then about everything else.”
A stake that doesn't follow on isn't backing for a young company. It's dead weight. Investors have a name for it: dead equity.
What an investor sees first on the cap table
A seed investor doesn't calculate with the round they're negotiating right now. They calculate with the three rounds after it. How much ownership shifts along the way is shown by Carta's data, based on more than 45,000 start-ups and funding rounds from 2020 to 2024. After the seed round, the founding team holds a median of 56.2 percent. After the Series A it's 36.1 percent, after the Series B 23 percent. After the Series A, external investors already hold half at the median.
Now lay a large, passive stake on top of that. Every percentage point held by a shareholder who contributes neither more money nor more work is missing from the founders. And the founders are the ones who are supposed to carry the company through every one of those rounds.
The independent review of UK university spin-outs commissioned by the government nails it. Founders need a big enough stake to have the financial incentive to keep going. And when the founders leave, investors' capital is most at risk. That's why investors want the founders who work in the company long-term to hold most of the founding shares.
Best measured: the universities
Nowhere is the problem as well studied as with university spin-outs, because there an institution systematically contributes technology in exchange for shares. Just like a corporate in a carve-out.
The UK review surveyed investors on this. Their message is clear: large stakes make spin-outs less attractive, especially in later rounds and for international investors. The average university stake fell from around 25 to around 18 percent in ten years. Many leading universities now close most deals at 5 to 15 percent. The review's recommendation: 10 to 25 percent as an upper limit for life sciences, 10 percent or less for pure software.
And there's hard data. Hellmann, Mulla and Qian analyzed UK spin-outs in 2025. Their finding: a university stake 10 percentage points lower increases the probability of raising venture capital by 8 to 10 percentage points per year. The threshold is especially revealing. Below the median, additional university equity has little effect. Above it, it significantly undermines the founders' ability to raise capital.
In fairness: in simple analyses, the effect isn't visible. It only shows up once you control for the fact that the most promising projects often negotiate higher stakes. The UK review calls the overall effect small. That's an important refinement. A stake in itself isn't a problem. A stake that's too big is.
And with corporates?
For corporate spin-offs the data is thinner, but it points in the same direction. Henry Chesbrough studied Xerox's 35 technology spin-offs. The higher Xerox's initial stake, the worse the spin-offs performed. More independent VC investors on the board went hand in hand with better performance, a CEO from Xerox management with worse. Chesbrough attributes this less to the stake itself than to the management practice that came with it. In practice that's not much of a difference: if you hold a lot, you have a lot to say.
Semadeni and Cannella reach a similar picture across 142 spin-offs: some links to the parent help, too many hurt. And Pahnke, Katila and Eisenhardt show that corporate venture investors help young companies less than independent venture capital funds, because the corporate logic limits their access to resources.
In fairness: corporates as investors can absolutely help
Now the objection, and it's a fair one. Gompers and Lerner found back in 1998 that companies funded by corporate venture units are at least as successful as VC-funded ones, especially where there's strategic fit. Park and Steensma show that corporate venture money helps above all when a young company needs specialized complementary resources or operates in an uncertain environment. Chemmanur, Loutskina and Tian find that such companies are more innovative.
That doesn't contradict the thesis. It sharpens it. All of these studies are about corporates that act as investors and keep investing. The thesis is about stakes that stand still. The UK review draws exactly this line: direct investments on market terms are something different from shares granted for a license. A corporate that follows on in every round is an investor. A corporate that once swapped technology for 35 percent and then watches from the sidelines is dead equity.
The signal nobody wanted to send
In my view, a second effect is almost always underestimated. A large corporate stake sends a signal. External investors read it as a promise that the corporate will co-fund the follow-on rounds. They plan the next rounds around that money. If it doesn't come, the round has a hole, and the young company is stuck with a shareholder who raises more expectations than it meets.
The opposite model exists too: the corporate that sets up its own fund and finances every venture across several stages to the hilt. Then the dead equity is gone, because the corporate does follow on. In exchange, it dominates every cap table, and hardly any external investor wants a piece of a company whose direction is ultimately decided inside the corporate. To be honest: there's no neutral dataset on the results of such programs. Gompers and Lerner merely found that corporate venture programs without a clear strategic focus are unstable and often shut down after a few investments.
The balance sheet has a say here too. If you hold a large stake and strong say-so rights, you end up faster with the equity method or even consolidation. Then the venture's start-up losses sit in your own numbers. More on this in the article Burn, Not Balance Sheet.
The rule of thumb
The data and practice point to a simple order. The corporate gets a relevant but small minority for technology and license. Relevant enough that success pays off for it. Small enough that no seed investor wants to negotiate it away first. The founders clearly hold the majority at founding. And if the corporate wants more, it invests in the rounds on market terms. Then it's an investor and no longer dead equity.
The UK review puts the principle behind it in one sentence that every carve-out lead should hang above their desk: it's much better to set up the cap table at founding so that it doesn't have to be fixed later.
A small stake in a company that gets funded is worth more than a large one in a company nobody wants to fund.
Sources
- Carta, “Founder Ownership Report” (2025): over 45,000 start-ups, rounds 2020–2024, median founding-team ownership 56.2% after seed, 36.1% after Series A, 23% after Series B; external investors 50% after Series A — carta.com (PDF)
- Tracey, Williamson, “Independent Review of University Spin-out Companies”, HM Treasury/Department for Science, Innovation and Technology (2023): large stakes make spin-outs less attractive (p. 14), average down from approx. 25% to approx. 18% (p. 14, per Beauhurst), leading universities mostly 5–15%, founders need a sufficient stake, set up the cap table correctly at founding (p. 14), founders should hold the majority (p. 16), recommendation 10–25% life sciences, ≤10% software (pp. 17–18), direct investments separate from license-based shares (p. 17) — gov.uk
- Hellmann, Mulla, Qian, “The Burden of University Stakes for Spin-Outs: Evidence from the United Kingdom”, ECGI Finance Working Paper 1090/2025 (2025): a stake 10 percentage points lower increases VC probability by 8–10 percentage points per year; effect above the median — ecgi.global
- Chesbrough, “The governance and performance of Xerox's technology spin-off companies”, Research Policy 32(3) (2003): 35 spin-offs, Xerox's initial stake negatively correlated with performance, more VC representatives on the board positive — doi.org
- Semadeni, Cannella, “Examining the performance effects of post spin-off links to parent firms: Should the apron strings be cut?”, Strategic Management Journal 32(10) (2011): 142 spin-offs, some links help, too many hurt — doi.org
- Pahnke, Katila, Eisenhardt, “Who Takes You to the Dance? How Partners' Institutional Logics Influence Innovation in Young Firms”, Administrative Science Quarterly 60(4) (2015): corporate venture investors help young companies less than VCs — doi.org
- Gompers, Lerner, “The Determinants of Corporate Venture Capital Success”, NBER Working Paper 6725 (1998): CVC-funded companies at least as successful as VC-funded ones, especially with strategic fit; programs without strategic focus unstable — nber.org
- Park, Steensma, “When does corporate venture capital add value for new ventures?”, Strategic Management Journal 33(1) (2012): CVC helps especially when specialized complementary resources are needed and in uncertain environments — doi.org
- Chemmanur, Loutskina, Tian, “Corporate Venture Capital, Value Creation, and Innovation”, Review of Financial Studies 27(8) (2014): CVC-funded companies more innovative — doi.org
