Academic Entrepreneurship by Michele Marcolongo

Author:Michele Marcolongo
Language: eng
Format: epub
ISBN: 9781118858967
Publisher: Wiley
Published: 2017-10-02T00:00:00+00:00

There are tax considerations associated with taking equity after the “founders shares” are issued, so now is the time to make these decisions for both you and your partners. Often, if you are bringing in management, like a CEO, it is common not to assign all of the equity at execution of the operating agreement but to hold some in reserve for future investors and/or other key personnel that you might like to incentivize with equity. Equity for the CEO can be vested over time or over milestone events (like funding rounds, first sale, regulatory hurdle, etc.). This again is part of a negotiation between you and your CEO. In addition, the total percentages of equity will need to be addressed, which can be a more challenging discussion. There are no real guidelines, but some strategies can be considered: all partners have an equal amount of equity and everything else.

There are many reasons for you to decide not to equally divide the equity among the founders. Considerations relate to the previous discussion as to your role in the company. Ownership in companies is largely based on your value to the company. The CEO brings management expertise and the ability to raise capital. You are brining technical know‐how to the company. The institution where you work is bringing IP (you may be the inventor, but the university controls the IP), and so the institution may require an equity position as you transfer the IP from the institution to the start‐up. You may also be technically necessary to advance the technology toward the commercial application and therefore bring value in those skills going forward. Depending on how much you agree to participate in the company, your equity position may be adjusted. It is more common for academic founders who keep their faculty positions not to take a salary, but to take an equity position and perhaps have a paid consulting agreement as the company gains investment. You may personally invest in the start‐up and that may have an influence on your equity position. Remember that these are starting equity positions and that this will all change after investors come into the picture after which all of the founders will likely be diluted in their equity position with each round of investment. So, your equity is not likely to increase as the start‐up evolves (unless you invest yourself), but be reduced to some degree in proportion to your founder’s shares.

In your company there may be common stock, preferred stock, and options. Founder’s shares are typically granted as common stock. Some definitions and uses for these types of stocks (Investopedia.com):

Common stock A security that represents ownership in a corporation.

Holders of common stock exercise control by electing a board of directors and voting on corporate policy.

Common stockholders are at the bottom of the priority ladder for ownership structure. In the event of liquidation, common shareholders have rights to a company’s assets only after bondholders, preferred shareholders, and other debtholders have been paid in full.

If the

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