TY  - JOUR
AU  - Hall,Robert E.
AU  - Woodward,Susan E.
TI  - The Burden of the Nondiversifiable Risk of Entrepreneurship
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14219
PY  - 2008
Y2  - August 2008
UR  - http://www.nber.org/papers/w14219
L1  - http://www.nber.org/papers/w14219.pdf
N1  - Author contact info:
Robert E. Hall
Hoover Institution
Stanford University
Stanford, CA  94305-6010
Tel: 650/723-2215
E-Mail: rehall@gmail.com

Susan E. Woodward
Sand Hill Econometrics, Inc
115 Everett Ave.
Palo Alto, CA 94301
E-Mail: swoodward@sandhillecon.com
AB  - In the standard venture capital contract, entrepreneurs have a large fraction of equity ownership in the companies they found and are paid a sub-market salary by the investors who provide the money to develop the idea. The big rewards come only to those whose companies go public or are acquired on favorable terms, forcing entrepreneurs to bear a substantial burden of idiosyncratic risk. We study this burden in the case of high-tech companies funded by venture capital. Over the past 20 years, the typical venture-backed entrepreneur earned an average of $4.4 million from companies that succeeded in attracting venture funding. Entrepreneurs with a coefficient of relative risk aversion of two and with less than $0.7 million would be better off in a salaried position than in a startup, despite the prospect of an average personal payoff of $4.4 million and the possibility of payoffs over $1 billion. We conclude that startups attract entrepreneurs with lower risk aversion, higher initial assets, preferences for entrepreneurship over employment, and optimistic beliefs about the payoffs from their products.
ER  -