Early Employees of Venture-Backed Startups: Selection and Wage Differentials

While much attention has been paid to company founders, very little is known regarding the first set of non-founder employees who join high-growth startups ("early employees"). This paper explores the wage differential between venture capital-backed startups and established firms given that the two firm types compete for talent. Using data on graduating college students from MIT, I find that VC-backed startups on average pay 8%-13% higher wages than their more established counterparts. I explore two channels for the cross-sectionally observed startup wage premium: compensating differentials and selection. The startup wage premium is robust after identifying and controlling for worker preferences for the three firm attributes (firm reputation, impactful work, and job security) that most strongly predict MIT graduates' entry into startups vs. established firms. To account for unobserved heterogeneity across workers, I exploit the fact that many MIT graduates receive multiple job offers and find that wage differentials are statistically insignificant from zero when individual fixed effects are employed. This implies that much of the startup wage premium can be attributed to selection rather than between-firm compensating differentials, and that VC-backed startups pay competitive wages for talent. Thesis Supervisor: Pierre Azoulay Title: International Programs Associate Professor of Management