Solving the Equity Equation

Please note that the following blog, and data therein, are based on OUP’s portfolio company cap tables only and should not be misconstrued as recommendations for model cap tables.

Startup compensation is often an opaque and awkward topic for first-time academic founders. How much equity do I receive? My CEO? The PI(s)? Other co-founders? How will my choices affect future compensation? The truth is, equity allotment is not a one-size-fits-all proposition. And as the data shows, there are a few roles that have an outsized impact on an academic spinout’s cap table. Considering the following strategies and investigating all compensation tools at your disposal can help create a productive balance of incentives and cost. 

The following observations are based on collective insights from a decade of working with hundreds of founders and an analysis of the equity structures of over 90 university spinouts. 

Think of equity like a pie, where in the earliest days there are three primary pieces: Lead Founder/CEO, Co-Founders/Employees, and an Option Pool for early hires. Figure 1 represents an example of a neatly sliced starting point for a typical cap table. The reality, however, is not so clear-cut. Founders must often look at the slice of pie in front of them and figure out how to divvy it up even more such that they can reward past successes and also incentivize future performance. 

Equity for your role may vary significantly depending on the number of co-founders at the time of company formation. Generally, the lead founder (or founding CEO) receives the largest equity percentage — typically 30%-50% as seen in Figure 2. If a CEO does not exist at the time of company formation, keep some equity reserved for the role in the future. 

Most of the university spinouts in our dataset had three or more Founding PIs involved at formation. This results in a base-case equity allocation of 15% each with the scale tipping +/- 5% in either direction. Conversely, if you happen to be a sole Founding PI, you are likely to take equity akin to that of a Founding CEO (30%!).  

Note: We define Founding PIs or scientific founders as the principal investigators, postdocs, or graduate researchers who developed the startup’s core technology at a university.

Our data shows that Founding PIs can expect anywhere between 10%-40% equity. This large spread speaks to the asymmetric ownership that exists within this pool (see Figure 2). Determining the exact equity percentage of Founding PIs is informed by three core variables: leadership, commitment, and reputation. 

Leadership. Occasionally, a Founding PI steps up from a more common role of CSO or CTO and takes the reins as Founding CEO. These “PI’s-turned-CEOs,” as we like to call them, are rewarded more than a traditional Founding CEO for the heavy-lifting involved. Only 16% of the Founding CEOs in our dataset were previously a professor or graduate researcher. On average, they received approximately 41% equity at founding, 11% more than typical Founding CEOs.

Commitment. Consider the PI’s time commitment to the company when determining equity. Our data reveals approximately 5% equity, on average, is granted to part-time PI Founders or those who spend around one day per week at the startup while still balancing their primary role in academia as a researcher/professor.

It’s important to keep part-time PI Founders on the cap table, even if they may not actively contribute to technology development. They are conduits to potential research collaborations, commercial agreements, and new employees. Part-time PI Founders and their respective networks can also play a significant role in fundraising. 

Reputation.  Well-known PIs are repeat successful entrepreneurs whose names are recognized throughout the academic and VC communities. This category of Founder PI demands more equity for being associated with a startup.  

Approximately 25% of the PIs in our dataset fell into this category and they received 9% more equity at founding than their traditional PI counterparts (29% vs. 20%) when there were three or more founders. 

All startups are unique, and the respective cap table should reflect that. Founders should avoid a cookie-cutter approach to issuing equity (i.e. “Let’s split everything equally!”). As the company grows, it becomes increasingly important to understand that not all members of the management team are created equal. University spinouts are no exception. While PIs may have poured their life’s work into the research that fueled the startup, their equity allocation is the most varied. As a founder, it is absolutely essential to address individual contributions and future expectations when building the initial cap table. Remember, once equity is granted, it cannot be taken back.  

Whether you are still planning your start-up or have already begun equity allocation discussions, make sure you utilize your resources and even tap expert opinions when possible. With years of experience spanning both the life sciences and the technology sector, OUP’s investment team is happy to offer valuable insight to founders with questions. Feel free to reach out to us anytime at info@oup.vc.