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Equity percentage for senior clinical leader for pre-revenue healthcare IT start-up?

This will be our #3 employee. We have a CEO and CTO in place. We are pre-revenue. MVP is almost complete and we have self-funded. We have strong interest from customers. This hire give us significantcreditability with customersand help us to close deals. Our candidate is a C-level nursing executive with several years experience in large metro hospitals. My best guess is that there will be 3-6 months without compensation. And a follow-up, if you can provide sample employment agreements that would be extremely helpful.

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Mike Moyer
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Mike Moyer Entrepreneur • Advisor
Managing Director at Lake Shark Ventures, LLC
The operative words here are "My best guess"

Nearly all equity splits are guesses. The CEO and CTO guessed once (probably 50/50) and now something has changed (a new person) and they realize their initial guess was wrong and have to guess again. This pattern means every time something changes the equity split will have to be renegotiated. This gets harder and harder.

You don't need a number, you need a formula. Slicing Pie is the only formula on the planet that will allow you to determine exactly how much equity each person deserves no matter what changes or who joins the team or who leaves.

Let's pretend your company was a hand of Blackjack. The CTO and the CEO agree to go in 50/50 and each put $1 on the same hand. If they win, they would split the winnings. But not everything goes as planned. The dealer deals two aces and the game gets more interesting. They decide to split the aces and double-down. The CEO puts down $1, but the CTO is broke. So, they ask this new guy to play. He comes on board and bets $1. So, now the CEO has bet $2, the CTO and #3 have each bet $1. The 50/50 split no longer works. It should be obvious that the split should be CEO: 50% (he bet $2), CTO 25% (he bet $1) and #3: 25% (he also bet $1).

What's going on here is that over time people are making new bets. Each time they bet the old split makes no sense. You need an equity model that can self-adjust to changes.

When people contribute time, money, ideas, relationships, supplies, equipment or anything else to a startup they are essentially betting on the future outcome of the startup. The amount of their bet is equal to the fair market value of their contribution.

A person's % share of the equity should always equal that person's % share of the risk.

Slicing Pie is a formula that accounts for each person's risk and allocates equity accordingly. It also has a formula for recovering equity in the event that someone leaves.

I've written a book about how this all works and you may have a copy if you contact me through SlicingPie.com

Good luck!
Lawrence Bell
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Lawrence Bell Entrepreneur
Specialist Master at Deloitte
Mike, Not to dispute what you are saying. i am trying to figure all this out and I certainly don't know what the right approach is, but I was having a conversation the other day and I was told that options tied to some sort of achievement or goals is the best way to go. It makes the event not really subject to taxes in the same way and if the person doesn't perform how you expect them to then there is a way to make the equity contingent on accomplishment. I don't know the right approach, I guess I am really asking. But what happens if you pick the wrong founding partner (hopefully that doesn't happen). Giving equity up front is one of those decisions that can't be undone easily and without cost. A simple dividing the pie doesn't seem to always work. To make matters more complicated. What if the CEO had the idea and CTO is there to help implement it. How do you value the contribution of each founder. It is just that I have trusted people before that shouldn't have been trusted as I am sure everyone else has. And without investment of money it is hard to make an assessment of how much value to attribute to an individual contribution. DO you know what I mean?
Max Roebuck
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Max Roebuck Entrepreneur
Founder
I would suggest you look at an equity figure between 1% to 15% depending on what this individual brings to the table and whether they are taking more of a co-founding position or a simple employee position (the latter would receive less). One thing you should certainly consider in my opinion is vesting that percentage over 4 years with a 1 year cliff. This basically means that if you gave them 10%, they would receive 2.5% equity every year (if split evenly) as long as they don't drop out in the first year in which case you're not liable for any equity lost.

For me, the one year cliff (its not uncommon to go to a 6 month cliff) is a no brainer and leverages the risk significantly as you'll certainly be able to get a true feel for what the individual is capable of thus reducing the 'guess' work involved.

Good luck!
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