The Evolution of CEO Compensation in Venture Capital Backed Startups

We use unique micro data to document the evolution of founder-CEO compensation over the life of private, venture capital-backed firms. Consistent with theories emphasizing asymmetric information, we find that founder-CEOs earn relatively little cash compensation early in the life of a new venture. However, the ability to commercialize a product is an important inflection point, beyond which VC- backed CEOs transition to “professionalized” compensation schedules where liquid cash compensation increases significantly in response to product and financial mile- stones. Since 80% of new startups either fail or hit transition milestones within three years of founding, we show that non-diversifiable risk borne by founder-CEOs is low enough for the vast majority of potential entrepreneurs to select into entrepreneurship even with standard levels of risk aversion.