Abstract

This paper provides causal evidence on how institutional constraints on side projects affect high-growth entrepreneurship, measured by the rate of VC-backed firms. We exploit the Alcatel v. Brown ruling, which expanded employer ownership claims over employee side projects in states lacking statutory protections. The ruling caused a significant decline in VC activity---fewer deals, smaller investments, and lower exit rates. It also reduced the number of hybrid entrepreneurs with graduate education. These findings suggest that legal restrictions on side projects deter entrepreneurial experimentation and shrink the pool of high-quality startup founders.