Founding member as funnel
A founding-member seat can carry no equity at all and still be priced right, when what it buys is a line of credibility that sends the right kind of inbound straight to where the other seat converts it. It took
Darby and Karni
Meaning
An economic taxonomy of information asymmetry categorizes the qualities of an exchange by the timing and feasibility of their evaluation. The darby and karni model isolates the point where a purchaser must rely on faith because the true utility of the work cannot be assessed even after consumption. Evaluation under these categories ranges from simple inspections prior to purchase to long-term observation of performance.
The boundary of the taxonomy is reached when the terms of an agreement are fully standardized, as fixed regulations remove the subjective element of quality verification.
Asymmetry Burden
Differences in knowledge between the one who performs the work and the one who pays for it create a structural imbalance during a handover. When a founder leaves the seat, the darby and karni classification explains why the value of relationships or internal code remains opaque to the incoming operator. A new operator cannot verify the soundness of these arrangements without spending heavy resources over several months.
The resulting friction increases the risk of opportunistic behavior, where the seller of a service bills for actions that were never performed or were executed poorly.
Verification Cost
Establishing the true state of an asset requires resources that scale with the obscurity of its design. Under the darby and karni analysis, the expense of auditing past actions is often higher than the value of the transaction itself. For a person leaving the seat, proving durability demands a costly signal that remains difficult to forge.
Evaluation Boundary
Unverifiable qualities of a service pose a lasting threat to the stability of a partnership. The darby and karni taxonomy demonstrates how the seller of a credence asset bears the burden of perpetual suspicion from the buyer. When the actual quality of the work cannot be assessed even after years of operation, any system failure is blamed on the predecessor.
Contracts designed around these properties must rely on deferred payments or equity retention to bind the founder to the long-term outcome of the handover. The unresolved risk forces both parties to rely on structural guarantees rather than good faith. By mapping the limits of what can be verified, the darby and karni analysis outlines the boundaries where contractual trust must replace direct measurement.
What a signature costs
A spoken promise costs the same whether it is kept or not, so it cannot tell you which of the two you are looking at. Economics settled that in 1973, and in the same year it settled the other half: