A study found that about 9 out of 10 founders of tech startups in the United States that received venture capital (VC) funding do not earn profits in the process of a sale or listing. The analysis said massive wealth is concentrated in a small number of success stories, while most founders struggle to be rewarded due to capital-recovery structures and equity dilution.

Fintech News Switzerland reported on Nov. 9 that research teams at the Wharton School of the University of Pennsylvania and the University of Zurich analysed investment and equity data for 157,669 U.S. startups and 248,454 founders.

The study estimated that 88 percent of founders had no equity cash-out proceeds at the time of a sale or initial public offering (IPO). Average exit proceeds per founder were $5.6 million, but the actual distribution of returns was extremely uneven.

Among only the founders who earned proceeds, the average was $47.3 million, but the median was just $4.8 million. Some 89 percent of total founder proceeds were concentrated in the top 2 percent, and the top 1 percent alone accounted for 79 percent.

The biggest reasons for failing to earn proceeds were company failure and unfavourable sale terms. In 81 percent of cases, companies failed or investors recovered sale proceeds first, leaving nothing for the founder group.

VCs generally hold preferred shares that give them priority in recovering invested capital. If a sale price is lower than or similar to the amount raised, founders holding common shares may not earn proceeds.

Even companies that exit successfully were not exceptions. The probability that an individual founder leaves the company before a merger and acquisition or IPO and receives no compensation was analysed at 39 percent. Management changes, conflicts among co-founders and vesting conditions can have an impact.

Swiss startups, by contrast, showed relatively high survival rates. A survey found 82.4 percent of companies founded in 2016 were still operating 10 years later. Company survival rates, however, are a different indicator from founders' exit return rates and are difficult to compare directly.

The study shows the financial risks founders face that are obscured by startup success stories. The proceeds distribution is an estimate based on investment data and does not include all income founders may earn through salaries or pre-IPO share sales.