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Founder-CEO Compensation and Selection into Venture Capital-Backed Entrepreneurship

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  • Michael Ewens Author-1-Name-First: Michael Author-1-Name-Last: Ewens

    (Columbia Business School)

  • Ramana Nanda Author-2-Name-First: Ramana Author-2-Name-Last: Nanda

    (Harvard Business School, Entrepreneurial Management Unit)

  • Christopher Stanton Author-3-Name-First: Christopher Author-3-Name-Last: Stanton

    (Harvard Business School, Entrepreneurial Management Unit)

Abstract

We show theoretically that a critical determinant of the attractiveness of VC-backed entrepreneurship for high-earning potential founders is the expected time to develop a startup's initial product. This is because founder-CEOs' cash compensation increases substantially after product development, alleviating the non-diversifiable risk that founders face at startup birth. Consistent with the model's predictions of where the supply of entrepreneurial talent is likely to be most constrained, we find that technological shocks di erentially altering the expected time to product across industries can explain changes in both the rate of entry and characteristics of individuals selecting into VC-backed entrepreneurship.

Suggested Citation

  • Michael Ewens Author-1-Name-First: Michael Author-1-Name-Last: Ewens & Ramana Nanda Author-2-Name-First: Ramana Author-2-Name-Last: Nanda & Christopher Stanton Author-3-Name-First: Christopher Author-, 2020. "Founder-CEO Compensation and Selection into Venture Capital-Backed Entrepreneurship," Harvard Business School Working Papers 20-119, Harvard Business School, revised Sep 2023.
    • Handle: RePEc:hbs:wpaper:20-119
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    References listed on IDEAS

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    Cited by:

    1. Mayer, Simon, 2022. "Financing breakthroughs under failure risk," Journal of Financial Economics, Elsevier, vol. 144(3), pages 807-848.
    2. Silvia Dalla Fontana & Ramana Nanda, 2023. "Innovating to Net Zero: Can Venture Capital and Start-Ups Play a Meaningful Role?," Entrepreneurship and Innovation Policy and the Economy, University of Chicago Press, vol. 2(1), pages 79-105.
    3. Rishabh, Kumar, 2021. "Bank as a Venture Capitalist," Working papers 2021/09, Faculty of Business and Economics - University of Basel.

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    More about this item

    Keywords

    Entrepreneurship; venture capital; executive compensation;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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