I am in the process of launching a new healthcare startup. I was able to recruit several prominent doctors and scientists to take part in the firm’s Board of Directors.  Approximately two months ago, I embarked upon a quest to find a qualified business partner (preferably – a successful figure in the healthcare industry). Two days ago I received a phone call from a very prominent physician who exhibited substantial interest in becoming my business partner. He is well known, well connected, and his area of expertise fits my business model like a glove. He wants me to give him a proposal that he cannot refuse. He stated that it should be generous equity share with a base salary that should commence payment when the company becomes profitable.  

Dr. VC - here is the problem: I don't have the slightest idea how much equity I should grant him…

He is not going to put money into the business at this stage (however, he is going to assume the full responsibility over the medical part of the business). I am convinced that if he joins the firm then the road to success is around the corner. I want him to really bust his butt for the business therefore i don't mind giving him a nice share.

Given that this startup is still in its “diaper” stage, I cannot really rely on any valuation calculations. What do you think should be my benchmark or guide on how to come up with the answer to this riddle?

I talked to several people from and they recommended granting him somewhere between 20%-25% with a kicker (in a form of warrants) equivalent to 5%. Does it make sense? I swear, I have no idea…

 What do you think?

 Any suggestions?

 I truly appreciate your great help,

 Thanks so much,

Yoel

Yoel,

Thanks for a good question.  Here's your answer: Hire an experienced start up/venture capital attorney to draft the agreement.

Is this doctor going to work full time with you?  What does his name bring to the table?  If he's going to work for you full time, without pay, and if his name truly opens doors for you, then that is definitely worth something.  But I'd be careful simply granting him equity.  I'd figure out some sort of vesting program, so if this guy flakes on you after one month, you're not stuck with him owning a large portion of your equity.  Also, you need to be careful that granting this guy equity doesn't trigger a tax event for him.  Again, talk to a lawyer with the specifics.

As far as what to offer...that depends.  I don't know who this person is, or what his qualifications are.  As a rule of thumb, this kind of involvement could warrant anywhere from 5% to 50%. 

Maybe you should tie his equity participation to certain goals, this way his goals and the company's goals are aligned.  Perhaps he earns a certain percentage of stock for each client he brings in.  Perhaps it's tied to raising money from investors. 

Ultimately, the right amount of equity will be what you offer and what he accepts.  If you want some specifics...try this (wetting finger and sticking it in the air): See if he'll take a package that could be worth 25%.  Set up a vesting program over 5 years at 3% per year, plus another 5% if/when the company hits certain revenue goals and another 5% if/when the company raises a certain amount of money from other investors.  If the company is sold at any time during these five years, and assuming he's still involved, all shares vest. 

Dr. VC
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Cynicism is not an end, but a means to reach objectivity.

I truly couldn't wish for a more complete and enlightening answer. I will definitely take your ingienious idea of tying his equity to certain business milestones. I guess i can offer him warrants that will vest after four years or after certain milestones are reached.

You brought a very valid point - what happens if he flakes on me after a short while. I guess your suggestion will help reducing the probability of this scenario.

I wonder if i need to sign him on a non compete agreement (just to be on the safe side). He potentially can depart after several months and use the knowledge and the business infrastructure that we've built to go around me and conduct his business...(I'll have to think about it more carefully)

In any rate, thanks so much for all your great points!

Best regards,

Yoel