The Evolution of CEO Compensation in Venture Capital Backed Startups

Abstract

We use individual-level data to shed light on the evolution of founder-CEO compensation in venture capital-backed startups. We document that having a tangible, marketable product is a fundamental milestone in CEOs' compensation contracts, marking the point at which liquid cash compensation begins to increase significantly – well before a liquidity event. “Product market fit” also coincides with key human capital in the startup becoming more replaceable, marking an apparent transition in the firm's lifecycle from 'differentiation' to 'standardization'. Although substantial increases in cash compensation for founder-CEOs in response to milestones improves the certainty equivalent of attempting entrepreneurship relative to flat pay, low cash compensation in the very early years can still deter entrepreneurship for potential entrants. We characterize the types of individuals most likely to be impacted by this constraint and hence those whose ideas are unlikely to be commercialized through VC-backed entrepreneurship.

Keywords: Entrepreneurship, venture capital, executive compensation

JEL Classification: G24, G32, J33