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

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  • Michael Ewens
  • Ramana Nanda
  • Christopher T. Stanton

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 in- creases 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.

Suggested Citation

  • Michael Ewens & Ramana Nanda & Christopher T. Stanton, 2020. "Founder-CEO Compensation and Selection into Venture Capital-Backed Entrepreneurship," NBER Working Papers 27296, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:27296
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Rishabh, Kumar, 2021. "Bank as a Venture Capitalist," Working papers 2021/09, Faculty of Business and Economics - University of Basel.
    3. Mayer, Simon, 2022. "Financing breakthroughs under failure risk," Journal of Financial Economics, Elsevier, vol. 144(3), pages 807-848.

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    More about this item

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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