

The Burden of the Nondiversifiable Risk of Entrepreneurship [pdf] - nprincigalli
http://www.stanford.edu/~rehall/HallWoodward6.pdf

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nprincigalli
Published: Robert E. Hall & Susan E. Woodward, 2010. "The Burden of the
Nondiversifiable Risk of Entrepreneurship," American Economic Review, American
Economic Association, vol. 100(3), pages 1163-94, June.

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 coecient 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.

