I recently listed co-founder asymmetry as one of the key failure conditions for startups. While definitely a major cause of startup collapse, there is one scenario where co-founder asymmetry can work well enough: university spin-outs where you have student-professor partnership. Students don’t have the expertise and seniority of their professors, but typically have far more hours to put into a venture. For this kind of relationship to work it is important that the expertise provided by the faculty member truly offsets the higher workload of the student. Just being a professor of high status isn’t enough (even if many professors would like to think so). Execution is king, so the high workload student has an intrinsic advantage in the value creation “competition”.
Professors likely have higher technical skill and prestige than their students but just having those isn’t enough. They need to find a way to inject these values into the start-up. Technology-wise, the professor has to be an innovation engine for the startup to offset the often relatively modest workload impact. Similarly, the prestige of the professor needs to translate into tangible opening of doors and recruitment of advisors. Both of these contributions also need to be maintained over time. Once a startup leaves campus it takes a certain kind of professor to remain deeply involved in an innovation function. Even rarer are professors that are able to continue to have a profound impact on the business side of the startup, through strategic guidance and door-opening. If this sounds demanding, consider the fact that the student co-founder is probably working 80-100 hours per week for her co-founding stake.
I had the privilege of founding a company with a professor who truly made all these contributions and more. Himself a serial entrepreneur and inventor of over 100 patents, he brought deep expertise to the game and had a profound impact on the company. At the same time, I have seen many student-professor founding teams that don’t balance at all. Often, those are primarily on the institutionally determined hierarchical relationship. Even if that relationship works during the first few months of the startup, as the startup gears up the professor will ultimately become an over-compensated co-founder which is almost guaranteed to lead to trouble down the road. University startups in particular need to be prepared in advance to for these shifts in co-founder dynamics. A good choice is to reverse-vest founding shares at specific levels of impact (e.g. full involvement, advisory services, no contribution). Alternatively, the startup can issue fixed founder shares to all but then create a large additional incentive grant to operational co-founders.
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Hi, thanks for the interesting piece. I am currently trying to solve a problem partly addressed by your piece. I worked in a Uni, spotted an interesting IP and expertise in a research group, came up with an idea/biz plan for a startup. However I will need the support of this young professor to provide technical guidance and support research collaborations between his lab and the startup. I offered him multiple options. He has preferred to currently take in only advisory role by being on the company’s SAB. What kind of stock incentives would be justified to give him? Note that the company will be separately paying the university for Research collaboration and other IP licensing. Is there some guidelines on allocating shares?
Thanks for your insights.
PF
Interesting question. I don’t know enough about the background dynamics to give any kind of definitive recommendation but here are a few guidelines from my experience. First of all, it’s useful to separate contributions and treat each one independently. Second, it’s worth to put a good vesting (or reverse vesting) structure around all equity grants to provide everybody with a break-up mechanism if things don’t work out (treating each contribution independently also helps with this as the break-up might not be absolute). So what are the contributions:
Thought: The person (in this role) principally contributes thoughts (or specific expertise, or inventions, etc. – but not labour). An hour of thoughtful advise will be worth much more than an hour of regular labour so the compensation can’t be tied to time. As a rule of thumb, a good board of directors, meeting monthly, usually ends up with a similar (collective) equity stake as a non-founding CEO (5-7% for the CEO so ~1% per member of a classic 5 person board). Advisory boards vary all over but you can probably scale the above for time. So if the advisory board meets every quarter its probably a third of the above. And so forth.
(All the numbers above are adjusted for a fully diluted cap table of a series A funded company. You will have the adjust to your current funding stake. Crudely, if you are before series A then multiply by 3-4 due to the expected 2-3 valuation rise before you hit Series A and the expected ~30% additional dilution at Series A.)
Labour: The person (in this role) principally contributes skilled labour. This is relatively easy. Estimate the fair market value on the basis of alternative corporate jobs that the person could get. subtract what you are actually paying her in cash and then divide the rest by the share price of your startup. That’s their incentive stake – she is effectively drawing a market salary and then re-investing a portion of it into your company in exchange for shares. More here: http://techentrepreneurship.com/2011/12/08/why-employee-equity-is-an-investment/
(This is a bit controversial because it can lead to scenarios where the first hire of an early stage startup gets a 10-20% equity stake according to this formula which people who get hung of on the “founder” title often intuitively dislike. My view is that if their cash pay and your startup are both worth so little then they effectively *are* co-founders and the high equity stake shouldn’t be a problem).
No matter what you calculate, also remember that at the end of the day you need to give the prof enough to be genuinely excited about the project. Don’t be stingy with early stage equity – its worth absolutely nothing unless you can build a successful business!