(2026). When Employee-Friendly Institutions Challenge Human-Capital Continuity in Startups: Evidence from Paid Family Leave Policies and Venture Capital InvestmentMax Planck Institute for Innovation & Competition Research Paper No. 25-13.
Employee-friendly institutions can expand worker protections, but their organizational consequences for young firms remain less understood. We examine this issue in the context of U.S. state-level paid family leave (PFL) policies, asking how PFL implementation affects startups’ access to venture capital (VC) investment. We argue that, by enabling employees to take paid caregiving leave, PFL can reduce startups’ continuous access to critical employees, weakening the execution and innovation signals that VC investors use to assess investment readiness. Leveraging the sequential implementation of PFL policies in New Jersey and Rhode Island, we use a staggered difference-in-differences design with coarsened exact matching to study VC-backed, growth-oriented startups. We find that PFL implementation reduces both startups’ likelihood of receiving VC investment and the amount they receive. The decline is stronger among startups with a higher pre-PFL female employee share, consistent with greater exposure to likely PFL uptake, and weaker among startups with greater pre-PFL occupational concentration, consistent with more internal substitutability. Mechanism analyses show increased female employee departures and reduced quality-adjusted innovation output. Additional analyses indicate that the effect is concentrated among smaller startups and early-stage investment deals. Supplementary robustness checks provide consistent support for our theoretical framework linking PFL implementation to reduced VC investment through disruptions to human-capital continuity that weaken execution and innovation signals. Together, these findings develop human-capital continuity as a boundary condition for understanding employee-friendly institutions and show how worker-protective policies can shape entrepreneurial resource acquisition indirectly by altering organizational signals used in external evaluation.
