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The Evolution of CEO Compensation in Venture Capital Backed Startups
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TL;DR: In this paper, the authors document new facts on the evolution of founder-CEO compensation in venture capital-backed startups and find that low cash compensation in the early years can still deter entrepreneurial entry.
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Abstract: We document new facts on the evolution of founder-CEO compensation in venture capital-backed startups. Having a tangible product ("product market fit") is a fundamental milestone in CEOs' compensation, marking the point where liquid cash compensation increases significantly – well before an IPO or acquisition. "Product market fit" also coincides with key human capital in the startup becoming more re- placeable. Although increases in cash compensation over the firm lifecycle improves the attractiveness of entrepreneurship relative to a contract with flat pay, we find that low cash compensation in the early years can still deter entrepreneurial entry.
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TL;DR: In this article, the authors developed the first option pricing model of venture capital-backed companies and their security values that incorporates the dilutive future financing rounds prevalent in the industry, and applied their model to 19,000 companies raising 37,000 rounds.
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