Founder-CEO Compensation and Selection into Venture Capital-Backed Entrepreneurship
The Journal of Finance, Forthcoming.
77 Pages Posted: 22 May 2020 Last revised: 13 Oct 2023
Date Written: September 1, 2023
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: Suggested Citation