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

77 Pages Posted: 22 May 2020 Last revised: 13 Oct 2023

See all articles by Michael Ewens

Michael Ewens

Columbia Business School; National Bureau of Economic Research (NBER)

Ramana Nanda

Imperial College Business School; Harvard University - Entrepreneurial Management Unit

Christopher Stanton

Harvard University - Business School (HBS); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 2023

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 differentially 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.

Keywords: Entrepreneurship, venture capital, executive compensation

JEL Classification: G24, G32, J33

Suggested Citation

Ewens, Michael and Nanda, Ramana and Stanton, Christopher, Founder-CEO Compensation and Selection into Venture Capital-Backed Entrepreneurship (September 1, 2023). Harvard Business School Entrepreneurial Management Working Paper No. 20-119, The Journal of Finance, Forthcoming., Available at SSRN: https://ssrn.com/abstract=3607524 or http://dx.doi.org/10.2139/ssrn.3607524

Michael Ewens

Columbia Business School ( email )

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National Bureau of Economic Research (NBER) ( email )

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Ramana Nanda (Contact Author)

Imperial College Business School ( email )

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Harvard University - Entrepreneurial Management Unit ( email )

Boston, MA 02163
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HOME PAGE: http://www.people.hbs.edu/rnanda

Christopher Stanton

Harvard University - Business School (HBS) ( email )

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Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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