Firm-Specific Human Capital and Governance in IPO Firms: Addressing Agency and Resource Dependence Concerns

Entrepreneurs with firm-specific human capital represent both a potential source of competitive advantage and a threat to appropriate the rents that are ultimately generated by a new venture. This situation presents interesting agency and resource dependence challenges. While potential investors in these ventures will want assurances that their interests are protected, they will also want to ensure that these key entrepreneurs remain with the organization. Using agency theory and resource dependence theory, we examine the types of governance mechanisms that are implemented in firms going through an initial public offering comparing those ventures which indicate a dependence on these critical entrepreneurs versus those that do not. Our analysis reveals that ventures exhibiting dependence on key entrepreneurs are associated with higher insider and outsider ownership by the board, greater start-up experience by the board, greater use of contingent compensation, and greater use of involuntary departure agreements.