Probably one of the biggest challenges initially is how to organize the company roles and how to allocate shares to founders and employees. There are lots of good blog posts that go into this in detail, but I wanted to put my own “medical device” spin on the question. Mainly, the thing to keep in mind which sets apart medical devices from other (e.g. software only) companies is time-to-exit-or-failure. How does this matter when you are thinking about roles and risks between founders (to begin with) and then early employees?
First, with respect to the elemental question of what is more important, “the idea” or “the execution”, in medical devices it is easy to say it’s 99% execution. There’s just so much more to execute before becoming successful—regulatory impediments, manufacturing challenges, clinical trials to show benefits, and marketing to four different types of customers (hospitals, doctors, insurance companies and patients). If the idea truly is revolutionary, it can be patented and the founder(s) responsible for the idea can be compensated through royalties from the patents. Otherwise, the people who execute the strategy and remain with the company should have larger shares than the “ideas” people (often professors in the university lab that stay with the university but are advisors to the company).
Second, leave enough flexibility in the capital table to compensate for changing roles and responsibilities. Because the path to success is so long, people can contribute in different ways not anticipated in the beginning. The cap table should have a large options pool that can be allocated as people grow into roles, take leadership of one area of the business and successfully navigate the challenges. The potential trade-off is that, unlike founding shares in a company that a founder owns whether or not they ever participate in the company again, options granted for special merit after founding shares have been allocated cannot be taken without a cost (the cost of the option) if the employee/founder leaves the company. Thus, for founders, some realistic guess as to relative importance is necessary at the beginning of the corporation’s life.
Finally, although it seems like would be good to avoid intra-founder conflict by giving all active founders in the company an equal share of the available shares, this is unwise, and may come back to bite everyone later when the stakes are higher. The question of relative importance in the company’s success is difficult to assess at the beginning of the company but should be consensually agreed upon upfront. If there are differences of opinion about which roles are easier to fill than others, it’s better to argue early, allowing the potential founder to leave then, rather than have the conflicts later when there has been a lot of energy invested. Later I will talk about how important it is to learn how to have difficult conversations in a startup, but this allocation question is a good time to start learning about conflict resolution.
With respect to the employee options pool, the only comment I would make is to have it be on the larger side of “normal” (you can read in other blogs what percentage of the company should be reserved for future employees) but keep in mind the long time-to-exit-or-failure in medical device companies, which will require more employees than startups in other industries. Maybe start with as much as 20% of the company. Early employees, especially engineers and regulatory affairs professionals who take the professional risk to go with a startup instead of established industry with higher salaries, great benefits and 401(k) plans will demand significant options to compensate for the professional risk. Thus you will go through the initial options pool rather quickly.