Firm Investments in Employee‐Led Entrepreneurial Ventures

ABSTRACT Firms increasingly support employee‐led startups by providing funding in exchange for equity. These investments create a dual role for employees, who pursue their entrepreneurial ventures as shared residual claimants while continuing to work on core tasks under incomplete fixed‐pay contracts. Although the investments align incentives within the startup, their effects on employees' effort in their core roles remain unclear. Using an experimental economics approach, I examine how a firm's investment decision affects employees' effort on core tasks. To isolate what is unique about equity investments, I use a non‐equity gift of equal monetary value as the baseline. The results show that employees reduce effort more when the firm denies a non‐equity gift than when it denies an equity investment. This difference arises because employees view a denied equity investment as the firm's business judgment based on risk and expected return, rather than as a failure to act generously. When funding in either form is provided, employees reciprocate positively, resulting in similarly high effort. Overall, the findings suggest that equity‐based entrepreneurship programs can help motivate effort on both startups and core tasks while mitigating the harm of rejecting employees' proposals.