Equity for Scientists Starting Companies

Earlier this year, my teammates and I interviewed over 100 teams for the first cohort of SciFounder Fellowship, and by far the most frequent issues we noticed were problematic equity splits amongst teammates. Some teams knew that their equity splits were in less than ideal shape, but most groups did not. Most of the teams we interviewed were led by early career scientists (usually graduate students or postdocs or people with a couple years in industry); these thoughts are meant most heavily for them.

 I think it’s the case that equity splits for scientific companies can be more complicated. In the software world, it’s pretty easy for e.g. two founders to just split things 50/50 and get going. More often than not, there aren’t other stakeholders involved, and things are pretty simple.

 With science companies though, there are often other groups that must be considered from the start – principal investigators / professors whose lab the scientist may have been in, or other part time people that may have been involved in some way in helping with the technological development prior to starting the company (let alone universities/institutions that may have claims on IP, which is a topic for another time). 

 It’s important to get your equity split right – equity is a very precious resource that you will need for yourself, your employees, and your investors. You want to have ample equity to be able to entice outsiders to join and support your company and you don’t want to lock up too much equity with early team members that will not contribute proportionate value over the years to come. You don’t want to feel resentful – as if you are letting others free-ride on your hard work over the coming 5-10 years. You also want to be smart about your starting equity as a signal to investors that you are taking this seriously and are not going to get pushed around.

 We repeatedly encountered a problem where scientists would give way too much equity to their PIs. Often, this was simply out of ignorance as to what was right. However, it was also commonly the case that this occurred due to the uncomfortable awkwardness that grad students and postdocs were negotiating starting their companies with their PIs while they were still their academic bosses.

If a PI is going to leave their post and be full time on a company, they deserve an equal (and potentially greater) share of the company. But it’s a different story if they are going to be part time, and likely prioritize their academic lab over the company.

There were a couple particularly bad cases where we spoke with PIs that felt it was fair that they should own a majority stake of their companies while they continued to run their academic labs. They expected their (soon-to-be) former students to work on the company full-time essentially as their proxy employees.

This type of situation is highly unfair in the long-run, as in most instances the hard work is still very much ahead of the company compared to where it is now. What has already been done in the lab thus far is likely a very small piece of what remains to be done, and the equity should be balanced accordingly.

I think it’s a fairer rule of thumb for professors (or other part-time figures) to have 10% or less of the founding equity of the company – if your professor is only going to be nominally involved, it’s pretty common to see them having 1-3% of the founding equity.

Remember too it’s possible to grant additional shares in the future – if a team finds that a part time co-founder is contributing more than their equity stakes seem worth, you can always make a grant of additional shares. Likewise the reverse may be possible too – if you’ve already accepted a poor equity split, you can try to fix it in the future. The sooner you do this though, I would guess likely the better, as it may be an even less comfortable conversation to have as time goes on.

 In terms of full time scientist co-founders, if you all are just starting out green from school or a job, it probably makes sense to split things evenly amongst yourselves. If one of you has already been working on the company for a while beforehand, or has done something significant like raise funding for the company already, it can make sense to have an uneven split. Even still though, remember to take into account the very long trajectory ahead – if all goes well, you will be working together for many years to come. [1]

Thanks to Lucas Harrington and Alex Schubert for reading drafts of this post.

[1]  All founders (and employees) should be on a vesting schedule, where equity accrues over time rather than all upfront. It’s common for it to be four years for founders, but consider longer if your company has a long research trajectory. In my company that has a longer-term than usual path, my co-founders and I set it up to have six years of vesting.