I am creating a medical device startup and I have some issues determining how to split up the various roles and responsibilities of founders, among other problems. My brother, a friend/partner, and I are the main owners of the company, in addition to a technical team who owns less than 10% equity. As I have personally been working on the idea for several years and will be acting as startup CEO, I will be taking 57% equity, and my brother (startup CFO) will get 17% and my friend (startup COO) will also get 17%. My friend is also willing to invest capital for our initial expenses (maximum of $20,000). We are close to registering our company as an LLC and finalizing our operating agreement which includes a milestone-based vesting schedule and reverse-vesting schedule.
I have several issues that hopefully somebody could give me some good advice on:
How do I determine who is responsible for which tasks/jobs/responsibilities?
Is it completely inappropriate for me to demand a small buffer (~6%) so that I will remain in control of the company (own at least 51%) once our shares begin to get diluted?
My friend/partner is demanding that we include a clause in our operating agreement that states that he will receive more ownership percentage if the company moves away from our original technology platform and starts other projects. Is this appropriate? Have other startups had similar scenarios? What will investors think of such a clause?
My friend is willing to invest money, but I know that if I make the shares he will be receiving worth the amount he is willing to invest, I would need to purchase my shares of the company as well at a price I cannot afford. Is this logic correct? How do I get him to invest without him actually getting more shares?
I have read that I will be taxed differently (income vs. capital gains tax) if I receive my initial shares as sweat equity versus if I purchase my shares at a nominal price. Is this correct or what do I need to understand in order to avoid the highest tax rate?
Does anyone know of any good guides/books on biotechnology or medical device startups? I have The Entrepreneur's Guide to a Biotech Startup, which is very helpful, but I would love to read more on the experiences of others in similar situations.
Thank you very much in advance for any input, I really appreciate it. Please feel free to ask any questions and I will do my best to clarify. Thanks again!
Co-Founder Equity Business Corporate Structure
[I'm going to stick to answering your first question: "How do I determine who is responsible for which tasks/jobs/responsibilities?" since that matches the title.]
First: in any startup, everybody does everything. Yeah, you may try to specialize a little bit, but you're not really at the point where one person can be Lord High Executioner and the other can be Lord High Everything Else. You're all going to have to work as a team together.
I would be rather concerned by your plan to split up the equity so unfairly. There is a super high probability that this will lead to resentment and bitterness. If I were you, I would strongly consider splitting the ownership 33-33-33. To compensate you for the time you've been working on the idea, I would have the new company sign a contract paying you, say, $250,000 for the invention (or some other reasonable amount). Of course, the company can't pay this money right away, but IF and WHEN the company does well, you will simply be paid a nice cash bonus for the invention. If the company fails, it doesn't matter who owns how much. And if the company fails, it won't pay you for your inventions, so you'll still own those -- 100% -- as it should be.
In short, when working as a team, you want everyone to feel equal. You're all working on the new company together.
That said, there will be some specialization. This is not rocket science: sit down around the table with your business partners, make a list of everything you can think of that will have to be done, and then talk about who is going to do what, based on interests and skills. Work on the assumption that the "work roster" might change constantly, and that you're constantly going to have to pinch hit for each other.
Experts point out that biotech attracts long-term investors who are willing to wait for years. Millions investing in them hope that the startup will nevertheless make a breakthrough and sooner or later bring billions.