The Burden of the Nondiversifiable Risk of Entrepreneurship [pdf](stanford.edu)
stanford.edu
The Burden of the Nondiversifiable Risk of Entrepreneurship [pdf]
http://www.stanford.edu/~rehall/HallWoodward6.pdf
http://www.stanford.edu/~rehall/HallWoodward6.pdf
Abstract: Entrepreneurship is risky. We study the risk facing a well-documented and important class of entrepreneurs, those backed by venture capital. Using a dynamic program, we calculate the certainty-equivalent of the differences between the cash rewards that entrepreneurs actually received over the past 20 years and the cash that entrepreneurs would have received from a risk-free salaried job. The payoff to a venture-backed entrepreneur comprises a below-market salary and a share of the equity value of the company when it goes public or is acquired. We fi nd that the typical venture-backed entrepreneur received an average of $5.8 million in exit cash. Almost three-quarters of entrepreneurs receive nothing at exit and a few receive over a billion dollars. Because of the extreme dispersion of payo ffs, an entrepreneur with a coecient of relative risk aversion of two places a certainty-equivalent value only slightly greater than zero on the distribution of outcomes she faces at the time of her company's launch.