Interview with Professor Noam Wasserman

As mentioned in a previous post, Professor Noam Wasserman at Harvard Business School does some fascinating research on executive compensation in venture-backed start-ups.  Since 2000, he has conducted an annual survey that has grown to include more than 500 privately held companies.  The results are truly fascinating and are a must-read for every entrepreneur, VC and start-up board member.  Noam also regularly posts on this topic and others related to start-ups on his blog–I highly recommend you check it out.  So over the past few days, I have conducted an "interview" over email with Noam and wanted to share.  I should note that Noam’s responses include input from research collaborator Mike DiPierro from the executive search firm J. Robert Scott.

FN: How did you become involved in studying startup compensation?

Noam: I study the most critical issues faced by founders, and have been interested in compensation in particular from two main perspectives. First, to the extent that compensation affects a venture’s ability to attract and retain key employees, it is important unto itself. Second, I have also found that compensation data helps give us a window into essential but hard-to-quantify organizational dynamics within a venture, so examining compensation issues can help us study issues that are hard to study in other ways.

FN: There are a lot of data on compensation including sites like, and Why do another study?

Noam: In 1999, when we began exploring doing a survey, there were a lot of sources of data on public companies, but we could not find extensive, solid, and detailed data on private companies. Thus, startups were flying blind when it came to compensation decisions. After the first survey in 2000, we received great feedback from the venture community as well as from the companies who, thanks to the Compensation Report produced with our data, finally had solid data with which to make compensation decisions. By getting so many companies to participate, we are able to slice the data along a lot of important dimensions, making it possible for participants to zero in on the true comparables to their own stage of development, industry segment, geographic location, and a variety of other factors. Academia has also lacked solid research data on private companies, so the survey data also provides me with a unique dataset to study important founder issues that haven’t been studied before.

FN: How many companies participate in your study? What filters to you apply to submissions in deciding whether to include them?

Noam: Annually, there are over 500 companies that participate. To be included, the companies have to be private (or very recently public), U.S. based, and in the Information Technology or Life Sciences (biotech, medical devices, etc.) industries. The survey population closely resembles the overall U.S. funding trends in terms of VC investment.

FN: Do you think there are any significant biases in the participants, e.g. troubled companies are less likely to participate skewing the figures higher?

Noam: We struggle each year with that question as it could certainly play into the quality of data we receive and provide. We feel that this issue is mitigated by our broad reach in terms of invitations to participate, our number of repeat participants, and the amount and type of slicing that we do with the data (enabling us to compare apples to apples).

FN: One of the main findings of your research is that there is a “Founder Discount.” What is this?

Noam: The “Founder Discount” is the subject of a paper published in the Academy of Management Journal in the Fall of 2006, and is summarized in a blog post here. Years ago, while discussing with a founder his problems negotiating compensation with his board, I realized that being a founder could actually hamstring you in such negotiations. (I recently completed a case, “The Tale of the Lynx,” that delves into this and other founder-related issues.)

Since then, I have seen the pattern on a regular basis and decided to test it more systematically using our survey data. I took the top management teams from our 2000-2002 IT surveys (a total of more than 500 companies) and examined their compensation. Even after controlling for a wide variety of differences across the managers (their prior work experience, equity holdings, etc.) and ventures (stage of development, size, financing history, etc.), there still remained a significant gap in compensation between founders and similar non-founders – i.e., a “Founder Discount.”

FN: So, why is there a Founder Discount?

Noam: I have found both voluntary and involuntary reasons for the founder discount. Both reasons can be traced to founders’ much higher level of psychological attachment to their ventures. On the voluntary side, this attachment often leads founders to accept less compensation in order to free up scarce cash for their ventures to invest in other important activities. On the involuntary side, most of what I have seen was captured nicely by the founder in my “Lynx” case. When reflecting on his threatening to leave the company if he didn’t get a raise, he said: “The board knew we were so attached to the company that we wouldn’t walk away – we had too much vested in building the company to leave over short-term cash compensation. So they knew it was a bogus threat. … We thought we were being altruistic, and figured we’d make it up later. We never could. That ended up being an albatross around our necks.”

One interesting fact is that the strength of both the voluntary and involuntary factors should diminish as the venture grows, and the data in fact does show that the Founder Discount is large in smaller ventures but disappears in larger ventures.

If your readers have seen other reasons for the Founder Discount, I’d love to hear them!

FN: You’ve been doing this study annually for several years now. Have you identified any trends?

Noam: One trend is that the Founder Discount persists across both up and down markets. Another pervasive trend, found in both our IT and Life Sciences companies, is that incentive compensation has played a much more important role in total cash compensation in recent years.