Abstract Many entrepreneurs commercialize an idea they initially developed as employees of an incumbent firm. While some face retaliatory reactions from their (former) employer, others are left alone or even supported. It is not clear, however, why some employee spin-offs face parental hostility while others do not, and to what extent this parental hostility affects employee spin-offs’ performance. Integrating the resource-based view with insights on competition and retaliation, we propose that parental hostility increases with the (perceived) competitive threat posed by an employee spin-off. Specifically, we advance employee spin-offs’ initial strategic actions (offering substitute products, hiring employees of the parent, and attempting to first develop the idea inside the parent) as key drivers of parental hostility and consequent spin-off performance. Results from a pooled dataset of 1083 employee spin-offs in Germany confirm that these initial strategic actions trigger parental hostility, which in turn, and contrary to expectations, positively affects employee spin-offs’ innovation and economic performance. These results advance the literature on employee spin-offs in several ways and have important practical implications.
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