I'm taking on a strategic partner to be the medical advisor and possible future COO. He will be working for equity until the company is profitable. How do determine a fair equity equation over the next 3 to 4 years?

Depending on how key this individual is to the company's success, the answer is likely to be in the mid single digit percentage points. For example, he may end up owning 5% of the company in stock options.

But since he is working for equity, you need to compensate him for not taking a salary too. I usually calculate this by figuring out how many shares his salary would have bought him if he'd invested his salary in the company (which is really what he is doing). Then, to compensate for the illiquidity of stock versus cash (salary), I up the result by 50% or perhaps a factor of 2. While there's nothing scientific about this calculation, it has worked well for me in the past.

Stock or options in lieu of salary should vest on a monthly schedule, as if salary were being paid, and there should be no cliff.

Stock or options given as an incentive (not as a substitute for taking a cash salary) should vest over 3 or (preferably) 4 years, and there should be a 1 year cliff to weed out employees who don't hang around or don't work out.

Answered 6 years ago

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