New Biotech Co wants me. What should I look for?

Factual Questions
1

I hope this doesn’t get too complicated but I could use some serious advice.

A couple of PhD’s have teamed up with people from a couple of different firms to start a new biotech company. The money will come from the established firms, the two PhDs will lend their expertise, and name to the project. They have approached me and another person to put together/develop/work at the company for a piece of the action. As far as I know it will be just the two of us initially doing the grunt work, while the others involved provide the money and technical experience.

I’ve got lots of questions, because I’m a suspicious person by nature. I’m sure they want us to work as hard as possible for as little as possible, while I don’t want to get screwed because I’m niave and ignorant of such deallings. The two of us have decided we would like $50,000 a year and whatever else we can get. They, I’m sure, would prefer to pay $30,000 and stock options.

My questions basically revolve around "Can anyone give me advice on what I should look out for to not get too screwed? How much is a reasonable amount of the company to request ownership of? (Should I be asking for 3% of the company or 30%?)

I don’t know if it matters or not but I’m 36 and have a wife and kid (I’m worried about being 40 and unemployed should the thing go belly up) I also will have a PhD soon in chemistry and have a couple of years experience in industry and 6 years in teaching.

Any advice would be appreciated.

2

Can’t speak specifically about biotech, but here are a few things to ask about with any nex company.

Ask to see DETAILED financial statements. You want to know how much capital they have to start with, how fast they expect to go through it (the burn rate) and when they expect to begin making money.

Just how involved are the PhDs in the company? If all they are is a couple of names on letterhead, then the fact that they’re trying to recruit you doesn’t mean squat.

Who’s going to be in charge of your department? Does that person have some sort of contract? I had a friend at an Internet startup who wound up working for three different bosses in four months – and each had a different idea of what the job should be.

Exactly what are the details of the stock options? Will they be issued at the “strike” price, the IPO price, some discount, or market value? How long do you have to wait before you can execute them? (The shorter the time frame, the better.) When do they expire? Can you sell them? (normally you can’t, but it doesn’t hurt to ask.) If other people who are being paid in options leave the company, do the rest of you get to divid up those options, or do they revert back to the owners?

What kind of employement contract do they want you to sign? If you have to wait before becoming eligible for options, do you have some sort of assurance you won’t be fired the day before you become eligible?

Also remember, you CAN be fired even if you have options. Hell, you can be fired even if you own stock. It’s not some sort of security blanket.

Finally, can you live on the cash portion of your salary? I note that you’re 36 and have a kid, and worried about being 40 and unemployed. Remember, most businesses fail. You may strike it rich if the company makes a big discovery, but in the meantime, you still have rent to pay. It sounds like you have a marketable talent, so you wouldn’t be unemployed for long, but be careful about how much of today you borrow in the hopes of a big tomorrow.

3

Thanks Kunilou! Stuff like this is what I need to know. Any one else???

4

Make sure you have a contract! In that contract, you have to have a clause, or two, about benefiting from your discoveries.

For instance, if you discover the genome that causes ‘morning wood’ or some other Earth shattering discovery on your own, you will be protected.

My grandfather developed a way to make industrial diamonds faster and cheaper. He did this on his own, outside of work. Nevertheless, the company he worked for claimed the process was theirs, by default, because he worked for them. (1950’s) When he threatened to take them to court, they paid him off. This type of thing is not unheard of, even today.

If you are doing research, have a lawyer go over your contract.

5

Make sure they’re not going to ‘accidentally’ develope something tiny with a short life that will eat you skin off.

6

Underscore what kunilou says. Can’t speak for biotech, but I’ve been around software startups. Yes, consider the stock options VERY carefully. You should get them at a stated strike price which will be cheap. I’d be very suspicious of any arrangement which doesn’t fix the price you’ll be paying for the shares. What I think of as a “typical” ISO deal reads something like: 1 year cliff (1 year before you can exercise anything), at which point you can exercise 1/4, the remaining 3/4 to be vested monthly over a period of 4 years following. There’s a lot of variation, though.

Remember that the stock does you no good until the have an IPO or get acquired (actually, there is the possibility that you could sell the “unregistered shares” you hold before an IPO, but you don’t want to go there). After an IPO there will be a blackout period during which you can’t sell. I don’t know about in biotech, but I’ve been through one IPO and 4 acquisitions in software companies, ranging from friendly to hostile. Actually, if I were going to start a software company, I might very well aim to get my valuation up, and be acquired at an attractive price, rather than go IPO. I’ve been through that scenario twice as an employee, and both times it was frustrating in terms of what happened to the product, but financially quite good in terms of the stock swap - if it’s a good swap, you instantly have a good price on shares in an already publicly traded company.

For software, your slice would realistically be closer to that 3% end than the 30%. There can be vast differences in various situations, but in the scenarios I’m familiar with, venture capitalists providing the seed money will take about 20 - 40%. The company will have to reserve a large slice as an ISO pool for future employees. For a “normal” software startup, “founder level” might mean something around a 2 to 5% slice, but there are a LOT of variations from “normal”.

Again, look carefully at their plans, and especially their source of funding.

7

More good stuff to consider. This is becoming quite helpful. madd1 your grandfathers diamond process seems interesting too, do you have details on the process?