The Evolution of CEO Compensation in Venture Capital Backed Startups

62 Pages Posted: 22 May 2020 Last revised: 4 Jun 2020

See all articles by Michael Ewens

Michael Ewens

California Institute of Technology - Division of the Humanities and Social Sciences; National Bureau of Economic Research (NBER)

Ramana Nanda

Harvard University - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER)

Christopher Stanton

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

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Date Written: May 20, 2020

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

Suggested Citation

Ewens, Michael and Nanda, Ramana and Stanton, Christopher, The Evolution of CEO Compensation in Venture Capital Backed Startups (May 20, 2020). Harvard Business School Entrepreneurial Management Working Paper No. 20-119, Available at SSRN: https://ssrn.com/abstract=3607524 or http://dx.doi.org/10.2139/ssrn.3607524

Michael Ewens

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
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National Bureau of Economic Research (NBER) ( email )

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Ramana Nanda (Contact Author)

Harvard University - Entrepreneurial Management Unit ( email )

Boston, MA 02163
United States

HOME PAGE: http://www.people.hbs.edu/rnanda

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Christopher Stanton

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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