When Subjective Judgments Lead to Spinouts: Employee Entrepreneurship Under Uncertainty, Firm-Specificity, and Appropriability

Abstract

We advance a theoretical framework of how entrepreneurial ideas of employees are commercialized as a function of their uncertainty, firm-specificity, and appropriability. We argue that as uncertainty increases, the choice of commercialization mode will increasingly be driven by differences in subjective judgments of the idea’s value, with firms having an advantage in assessing the true value of their employee’s ideas relative to market because of their firm-specific nature. Building on this insight, we develop a formal model of commercialization choice that maps idea characteristics to commercialization outcomes—spinouts, internal commercialization, market mobility, or abandonment—while also predicting how these relationships will be moderated by the cost of startups, the value of the idea, and the institutional context, as well as how value will be created and appropriated within each mode. In particular, the model distinguishes between four different types of employee spinouts, including the previously neglected case where the employer sees value in an idea and wants to commercialize it, but the employee still prefers to start their own firm. We thus offer a more nuanced view of employee entrepreneurship, based on differences in subjective judgment under uncertainty, the firm-specific nature of employee knowledge, and appropriability regimes.