How should we split ownership of our startup?

I am starting a company with two students. The company has licensed the technology I developed from the university; they will run the business and I intend to consult for the company while keeping my job as a professor.

Th Mchang

Milton Chang

I am starting a company with two students. The company has licensed the technology I developed from the university; they will run the business and I intend to consult for the company while keeping my job as a professor. How should I value the technology to split the company ownership fairly?

This question comes up a lot. A flippant answer is “Whatever you can get,” because there is no right or wrong way of looking at this. More seriously, it depends mostly on how much of the know-how resides in your head or how indispensable you are to the success of the business.

Most people think the split should be based on the ratio of what each person puts into the company, but the split should actually depend more on the future. For instance, when entrepreneurs raise money, they figure the ratio of ownership is based on the value of what they have created and what the investor will ante up. In reality, investors calculate the valuation based on how much the company might be worth at the time of an exit, and give little consideration to the current value of the company.

If the split is based on the current input, then you can justifiably push for as much as you can get because this community puts a high value on technology. It is not uncommon to see a professor retain more than 50% or agree to a three-way equal split to avoid an argument or the appearance of being selfish.

At the other extreme, some would say you have very little coming. The technology belongs to the university and is paid for, and consultants generally do not get shares. You can certainly negotiate to get shares in lieu of consulting fees and can also get shares as a director. From that perspective, 10% to 20% may be a good starting point.

That said, let me offer a different way of looking at this, which is fair and is also to your advantage-if you think this is a big opportunity. You can trade your future technology contributions for something like a 3% to 5% ownership at the time of a real exit as “royalty.” Such a small percentage makes it easy for everyone to agree and yet can be worth a lot in the event of an IPO. A big number up front is hard to swallow, and it could mean nothing because there might be many rounds of financing that could significantly dilute your percentage ownership. From your standpoint, as a consultant, anything you invent relating to this business, by default, belongs to the company; from the other owners’ standpoint, they would be locking in your services and have one less competitor.

I worked many years at NASA as a laser R&D technician and have been out of a job for six months. Where are the jobs?

Your question actually points to the shift taking place in the laser/photonics industry, even while most people believe the optical business is booming. Keep in mind: “If you are in a hole, digging harder will only get you in a deeper hole!” That means you’ll have to regroup and evaluate your strengths and weakness, as well as the environment and trends, to figure out where you can be most valuable.

Budgets for R&D are shrinking. Even if your program at NASA is not cut, you may be competing with technicians displaced in industry. You want to go where there are new applications of optics such as biotech, biomed, homeland security, clean-tech, communications, and so on. You may not want to be in a volume-production environment, like telecom components, solar cells, or LEDs, because, unlike R&D, the work can be routine and based on rigid processes. However, you could be incredibly valuable in a small-volume production company making medical devices and homeland-security sensors equipment. There, you could play a supervisory role, ensuring that assembly people do not do bad things to optics by treating them like mechanical parts. Another idea is to make an adjacent move, such as working for a company that caters to government needs like the defense industry where the production volume is modest. Given that you have security clearance, you can get a job working on classified products (not projects!).

Th Mchang
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Milton Chang is managing director of Incubic Venture Fund, which invests in technology startups. He was CEO/president of Newport and New Focus and currently sits on the boards of Opvista and Precision Photonics. He holds a B.S. degree from the U. of Illinois and a Ph.D. from Caltech. He is a Fellow of the OSA and LIA, and a former president of LEOS and LIA. He is a recipient of Distinguished Alumni Awards from both universities, serves on the board of trustees of Caltech, and is a member of the Committee of 100. Visit www.incubic.com for other articles he has written.

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