Physicians in medical startups are gaining more and more traction, often playing the role of advisors. Some are also initial employees. As such, they are entitled to some sexy stock options. Let’s get into that in this post.
I just completed a call with the medical startup company who has decided to offer me a full-time position with some stock options in the company (equity). There are a lot of factors to consider and the so let me delve right in.
For those who aren’t caught up, I have been working for a medical startup since last year on a part-time basis, mostly as an employee and at times an advisor.
They are planning on offering me a package worth around $200k/year, a portion of which will be equity in the business. They are in the seed stage and about to enter Series A.
That’s the gist of it but there is a whole lot more to the story. In this post, I want to talk about the whole startup world and how funding is secured and how employees are compensated.
I will talk about my options and how I can benefit from this situation.
how startup funding works
As you may have heard, billion-dollar ideas don’t mean anything unless there are individuals who are willing to make something of it.
Let’s talk about all the stages, from the time an idea is born, all the way to the point that the business goes public as an IPO.
1. Business Idea Stage
In the idea stage, the entrepreneur(s) has likely had multiple plausible business ideas in their field of interest. They are finally ready to take the idea live. Whatever the process might be, they get started.
2. Business Establishment Stage
In this stage, the idea is taken from words to a solid business plan with timelines and a budget.
This could be something as simple as starting a website, getting together with business partners or building the software needed to run the idea.
The business partners are putting in all the work. There is no money yet for employees, it’s all bootstrapped.
3. Initial funding Stage
In this stage, think of hitting your family and friends up for money.
Legally, a business entity can’t go on Craigslist and ask people to invest their money with them. They can, however, hit up family and friends for a healthy sum of cash – in return for a certain percentage of the company or as a loan.
Your brother who is already running a successful business might agree to put in $50k in return for 5% equity. A simple legal document is drawn up between you and your bro.
Documents are drawn to establish a legal business entity and this 5% must be entered in the books, protecting your brother’s share in the business.
4. Incubators, Accelerators & Angeles
This is called the seed round. Think of a physical seed being planted, with the money raised in order to grow it into a successful business.
Getting money from investors is as important as having help from great advisers. $50k from one Angel investor with incredible talent and connections may be much better than $150k from someone with not much interest in that particular business.
Incubator firms do just that, incubate the company and see it through the various future stages. They offer some startup capital and a ton of mentorship – in return for equity.
Accelerators are similar to incubators but they are accelerated, meaning, there is often a time-frame where a huge list of resources is provided to the startup in return for, of course, equity.
Angels are accredited investors who often have a particular niche interest. They may invest in businesses focused on healthcare or humanitarian ideals.
By offering a portion of the company to these entities, the shares of the business partners, the wealthy brother, and future potential investors will decrease.
5. Venture Capital Stage
During the Series A rounds, the CEO will go around pitching the business to various VC firms in order to raise major capital, in return for equity.
By this time, the company will have its initial employees, often just a handful of individuals who are either engineers or in the case of a medical company, physicians.
From what I have seen, the initial employee can negotiate somewhere in the 1-5% range of equity – cutting into the business pie some more.
6. Further Stages
After Series A of raising capital, the company could go on to have Series B and C – terms used to indicate further raising of capital.
Either the company will then be acquired by another company for a large sum of money or the company is taken public by a bank.
The IPO stage, when a company goes public, serves various purposes. Let’s not get into it here too much because it’s highly controversial. Basically, the purpose is to allow further investing to come in and for the initial investors to cash out their equity.
The Initial Employee
The initial employee (aka early employee) is someone who is willing to deal with the chaotic ups and downs of a new business, work for a lower salary, often longer hours, and in return get some stock options (equity shares).
Beyond the initial employee are future hires who also will want some shares in the startup. For these individuals, a portion of shares is set aside called the option pool.
The equity is lower than what the initial employee gets and is also lower on the payout priority.
The initial employee works closely with the business founders and works beyond their scope in order to get the business off the ground.
Many, many, many employees have been burnt by starting on the bottom floors of a startup just to see it fail a few years down the road. If they walked away with almost no salary and a ton of equity then it was a shitty gamble.
The equity offered to the initial employee may also have a vesting timetable. Meaning, the employee may have to stay on for a set amount of time at that set salary for a few years before they can officially own those shares offered to them.
If the business is acquired by another company before the vesting occurs, they may have to deal with income renegotiations or working for a shitty company who may implement their own terms.
Did you opt for acceleration on change of control? No, what the fuck does that even mean?! Clashing with the new CEO may not be your best move.
Let’s say you enjoyed working remotely for the parent company, but the new owner wants you to be on site – this is a tough situation to deal with. Did you stipulate it in the initial contract? Was your contract negotiable?
My Offers And Options
I can’t disclose too much information since the company is pursuing some hefty Series A investing. I expect my annual compensation package to be worth anywhere from $160,000-$200,000.
We had a conversation about what it is that I was looking for and what they could offer. In the next 2-3 months we will go back and forth and finalize a deal.
1. Do I want to work full time?
Nope. Not a single hair on my body finds the idea of full-time work exciting. By full-time I mean a set schedule of working from x-to-y.
Having autonomy over my day is, after all, my number one priority. Time remains the most expensive commodity which I have to trade and I feel I have traded enough of it.
I am willing to work on a project which is in line with how I would want to spend my free time, even if it means working 10 hours a day on it.
I would spend 10 hours a day working on an urgent care which delivered cheap effective healthcare to those who cannot afford health insurance.
I would spend more than 10 hours a day on a real estate investment which delivered affordable and safe housing to those who cannot afford so otherwise.
2. What is the Business equity worth to me?
I already walked away from my pension at Kaiser Permanente. I wasn’t willing to put in the extra 2 years needed to vest.
If this company wants to offer me 20% of my compensation in form of company stock then I need to know what this 20% could be worth in value – I don’t care as much about the numbers.
I would be possibly giving up this 20% in return for 1-2% of equity in the entire value of the company.
Should the company sell for, let’s say, $30,000,000 then I could have a pre-tax equity of $300,000. After taxes and the legal fees, I would be left with $200,000. Divide that over the years of vesting, which I figure would be somewhere around 4 years, that would be $50,000/year.
This is the realistic valuation of my equity. It could be much lower. Could it be far higher? Sure, let’s say the company gets sold for $150,000,000. Then I might end up with $240k/year for a total of $965,000 of compensation, after taxes and after legal fees.
3. My counter offer
Thankfully, I only have a handful of people reading this blog, my mom, my sister, my imaginary friend Fred, and my stalker – I would hate for the owners of the startup to discover my haggling strategies.
I am not interested in lucrative stock options or a sexy salary. In my current idealistic stage, I am drawn more to helping a worthwhile medical startup succeed.
If I can secure a position as the chief medical officer, a medical advisor or some sort of consulting expertise, I would be much happier than the promise of dollars.
In medicine, I pompously feel that I have already succeeded at patient care (watch, a lawsuit waiting to happen!), I have gained adequate experience in administration and I know the kind of medical model which I want to be a part of.
It would make more sense for me to play the role of the advisor, casting a bigger net (to catch… soy-based fish…), than to keep seeing patients – there is no advancement there, or it’s so painfully incremental that it might as well not exist.
I will take the lower pay, more autonomy over my time, a role that allows me to gain more experience in advising, a chance to meet some incredible thought leaders in this space, and learn a very marketable skill.