Share allocation: academic startup

What is the best way to allocate shares in a startup where half the potential founders are professors at an academic institution?

In this situation the professors have developed the technology over a number of years with money from grants combined with the use of university facilities. Naturally, the university will take an equity stake in the company when it licenses the technology to the company. It is in the interest of the company to keep the professors involved as our product is approximately 2/3 complete and will require input from the professors after the company is founded. As expected the professors do not want to leave their secure jobs to take part in the startup. Alongside the professors, there will be an additional 2 founders of the company. What is the most equitable way to allocate shares to reward the professors for their years of hard work developing the technology and to keep their interest in participating with the company after it is founded? I have read Joel Spolsky's comment on share allocation, but think this situation is unique enough to warrant a more specific answer.

I understand that engaging the professors as paid consultants to the company is one way to keep them involved after formation, but is it really reasonable to put all the emphasis on the future when allocating company shares?

Thanks in advance.

My take would be to work out a figure for the effort and money already put in. Compare that figure to the other shareholders contributions over the next 2 years (weighting the new one for "ongoing" risk).

OR

You simply say the royalties per unit will be paid.
This is then just a cost per unit issue for you.

OR

Royalties on profit (not revenue) of x% will be paid.
This means that you get to break even as a company before having to pay them anything.

The royalties difference They are still invovled in ensuring their continued royalty payments but aren't interfereing in the running of a company.

This is a common arguing point between the achedimic and business world.

The bigger question : Dilution over time.

As the company grows, it will put more and more into the IP and grow the solution away from its current starting point. Thus their original contribution will deminish as a percentage over time.

You may choose to say "doesn't matter, we wwouldn't be here" or you may put a review point in for 3 or 5 years.

The review makes sure they keep contributing so as to keep their side of it higher.

Problem of split : For the Uni and researchers you have to manage who gets what ... Well for long term survival you do.

• The easiest is to say "there is one entity we pay, that entity then splits it as it sees fit". Basically make it their problem to work out.
• The safest long term is to pay each one their little bit and review each one independantly so as one person drops off or another one comes on you can manage the splits. This has a higher risk from their "not feeling right" point of view and a higher effort but it allows you to manage their "long term interest" in the product.

To assure the company's long-term success any solution must address the issue of fairness for the founders, professors and future employees. Not doing so would imperil the success of the company.

Let's look at this problem as if we were about to make an investment in the company. We judge the company has a certain valuation. This valuation has been created by the actions of the founders and the professors.

Thus, the current stock in the company is allocated among the founders and the professors in proportion to the value each has created. To keep everyone interested in participating, we want to attach a vesting schedule to these initial shares, so that neither the founders nor the professors can simply take the stock they receive today and depart; they have to remain part of the company going forward.

The company's product is not ready for sale; so there is a certain amount of development left to be completed. Presumably, there will also be sales, marketing, product support, and production required to turn the company into a profitable institution. We investors want a stock budget to be established for future employees who are needed to staff these functions.

The stock budget would be also include stock compensation for the founders and the professors in exchange for their future efforts. This stock is usually allocated annually after a review of the company's progress. This stock is in addition to normal salary and other compensation that employees or consultants would receive.

All this future effort will require cash; since the company doesn't yet generate any revenues. So normally we investors put in cash at this point, and the valuation of the company is increased to account for the investors' contribution.

The new total valuation will be divided among the founders and the professors, as creators of the initial value; among the investors, in proportion to the cash contributed; and for the stock budget for future contribution.