CEO Compensation in Private Venture-Backed Firms

Ola Bengtsson
Johnson School
Cornell University
Ithaca, NY 14853-6201
Tel.: 607.254.8807
John R. M. Hand
Kenan-Flagler Business School
UNC Chapel Hill
Chapel Hill, NC 27599-3490
Tel.: 919.962.3173

We study the pay earned by CEOs during the early life-stages of private venture-backed firms. The typical venture-backed startup needs considerable external financing to survive and flourish, but faces illiquid and informationally opaque capital markets. This makes fundraising a vital but difficult CEO task. We therefore expect that CEO compensation will be linked to how successfully the firm raises capital. Using a new compensation database on 1,585 U.S. venture- backed firms, we show that CEO cash pay is indeed higher for companies that have recently raised more equity, and that have attracted more experienced VCs. We argue that the observed elasticity on fundraising is unlikely to simply reflect differences in firm size because it is robust to controls for firm characteristics, firm operating performance, and firm valuation. CEO cash pay is also larger when fundraising is more difficult, and is smaller for executives who are not involved in fundraising. In the time-series, CEO cash pay increases markedly in the year after a financing and increases more if the company raised more capital. Finally, we show that while successful fundraising dilutes the CEO’s percentage ownership, it increases the dollar value of that ownership. Our findings suggest that cash and equity compensation help align CEO incentives even when sophisticated investors such as VCs are active monitors and hold strong control rights.

JEL classifications:    J33, M13, M52.

Keywords:   CEO compensation; financing; pay-for-performance; private venture-backed firms.

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