Equity/founder shares for a scientific advisor who may take on larger role in 6months-2 years?

Anonymous Founder and CEO at Cypre, Inc.

Last updated on February 3rd, 2017

Dan Gordon Entrepreneurial Digital Healthcare Transformation Champion

November 18th, 2015

See Slicing the Pie By Moyer Dan

J Moore Publisher: EV World. Founder & Interim CEO of QUIKBYKE

November 20th, 2015

I used Mike Moyer's 'Slicing Pie' equity sharing concept.  www.slicingpie.com.  My investors were agreeable to it.

Joe Albano, PhD Using the business of entrepreneurialism to turn ideas into products and products into sustainable businesses.

November 18th, 2015

It all boils down to what do each of you (each member of your startup team) want to accomplish by awarding/obtaining equity? Equity is an investment in the future of the company. How important is it for each individual to be invested? 

You mentioned "depending on ... the success of the startup". The value of any equity is completely dependent on the success of the startup. Once there is a track record of success, the equity is (at least in theory) worth more - so an individual would receive less equity (as a % of the enterprise) for the same contribution. 

If a goal the equity award is to increase commitment, then having equity might motivate the individual to do everything personally possible to support success. That might factor into your equity strategy. 

It's often useful to think about equity (an investment in the future of the company) separately from pay (compensation for the market value of the goods and service provided). If you could pay your partners in cash, would they use that cash to purchase the equity you are offering? Answering that question might give each of you some perspective on the personal value and desirability of equity. 

I admire your decision to award equity based on performance, not simply a time-based vesting scheme. It's usually the fairest option. Then there are the matters of dilution and liquidation ... both issues that can touch on perceived fairness, future (monetary) investor participation, and legal/contract issues. 

We (my consulting firm and our clients) usually find that having honest, open, and often difficult conversations "while we're still friends" (and as early as possible in the process) then using contracts to document those common understandings (rather than to try to gain some kind of upper hand) is the best approach. Unfortunately too few founding teams bother to make the effort. 

Thanks for caring enough to at least ask the question.  

Peter Johnston Businesses are composed of pixels, bytes & atoms. All 3 change constantly. I make that change +ve.

November 22nd, 2015

There are always fair-weather friends clustered around a startup. People who "will join when".

The truth is that the really hard bit is the first few months. Turning a company value of zero into something worthwhile and generating revenues strong enough that the people who really want a job, not a startup are happy to join. This person wants to sit on the sidelines and watch you make it a success before they join.

It is easy to see equity as a way of getting people to work for free in the early stages. But if your company becomes a unicorn and you've given away 5% to get scientific advice at the beginning, that advice has cost you $50 million.

Set a price for their consultancy and offer them deferred revenues - say twice the current going rate in exchange for waiting 12 months. Then in 12 months time, if you don't have the money, you can offer to change those revenues for a share in the company at the going rate at the time.

Anonymous Founder and CEO at Cypre, Inc.

November 19th, 2015

Thanks for the input, everyone. Great to see different insights.

A. Andrew Chyne

November 21st, 2015

Giving equity doesn't guarantee the performance of an employee. One needs to be aware of this fact. I do understand, you need someone to deliver ASAP since the joining date. But remember a person is a human being, he or she needs time to understand your concept. Start analysing the person after 6 months of his joining. This would give you an initial picture whether it's good or not, to offer him or her an equity. 

Liza Taylor Communication Specialist at Keyideas Infotech

November 21st, 2015

Give an equity to the one whom you feel is committed. If the third person is being utilized only for providing consultant; I would suggest you to pay him as per his market value rather than giving him a stake. Offering a stake to anyone who is not fully active in the organization can be a disaster in future. I do understand that you want to get the best of everything from the concerned person but at times, you need to put your thoughts on hold for a moment or two. 

Good Luck. 

Mike Moyer

November 22nd, 2015

A couple of people recommended my model, Slicing Pie. The Slicing Pie model is a formula for getting an exact answer to your problem using relative risk.

When an individual contributes anything to a startup company, such as time, money, ideas, relationships, etc they are, in effect, "betting" on the future of the company. Some people bet a lot, some people bet a little. Each day that goes by more bets are made as people continue to contribute to the startup.

Each person on your team is providing a different level of contribution and different levels of commitment with an understanding that things may change in the future. They are each making different bets and, therefore, accepting different levels of risk.

The Slicing Pie model allocates equity based on the fair market value of the risk. So, an individual's share always equals the amount of risk they take divided by all the risk taken by everyone.

It changes over time to ensure that every person always has exactly what they deserve regardless of what changes. 

Most equity models are based on guesses about the future, rules of thumb or negotiation skills. Only the Slicing Pie model produces an exactly right split.

I've written a couple of books on this topic,  you may have one if you contact me through SlicingPie.com 

The bets are at risk

Joe Albano, PhD Using the business of entrepreneurialism to turn ideas into products and products into sustainable businesses.

November 22nd, 2015

Peter Johnson raises some interesting points - mostly about understanding the ultimate price that may be paid for early equity decisions. From a purely logical perspective, paying (with future equity) for services is clearly preferable to granting equity that may greatly exceed the value of a potential unicorn. 

The challenge is that life and business are never that predictable. I admire the positive outlook that results in the belief that your company is destined for $1B+ valuation. However, credible studies indicate that the chance of survival, let alone unicorn status are somewhat unimpressive. 

Consider this alternate scenario: 
  1. Vendor A provides services to company. These services have a fair market value of $25,000.

  2. Company agrees that it will pay $50,000 for these services in 12 months time.

  3. Vendors B, C, and D also provide services of identical value under identical terms creating a total encumbrance of $250,000. 

  4. 12 months hence company has neither the cash nor the cashflow to support this, now-due, debt. 

  5. Company has an accurate valuation of $350,000.

  6. If we trigger the "offer to change those revenues for a share in the company at the going rate at the time." the resulting ownership doesn't do anyone much good.
Everyone needs to understand the basic roles of compensation (pay for services rendered) and equity (investment in the future success of the entity). The solution above amounts to deferred equity - with protection on the upside for company but no reciprocal protections for vendors on the down. Whether the equity is granted at the time services are provided or on a deferred basis, the vendors are making an investment in the future success of company.

I suppose that the owner/owners of the enterprise could personally guarantee payment for the services. That could result in the loss of homes and vehicles ... and the belief that you may be giving up $50M in equity might be worth it. 

The reality is that early stage companies are risky ... the question becomes who takes on what riskis in exchange for what potential rewards. 

Things are rarely formulaic and straightforward. All of this boils down to the need to have a conversation with all of the concerned parties and put all of the cards on the table. Unfortunately jockeying for the upper hand seems to often trump the willingness to enter into that conversation. 

Peter Johnston Businesses are composed of pixels, bytes & atoms. All 3 change constantly. I make that change +ve.

November 22nd, 2015

Thanks for the namecheck Joe. The reason for suggesting this as a fair offer for a co-founder is based on exactly what you have outlined.

If he accepts the delayed figure for his services in 12 months, then he is committing himself to the future of the company. If he doesn't accept this, then he is not being an entrepreneur but just selling his services.

But you are 100% right - it isn't the way to pay for everything.