Nanogene Technologies, Inc.

Case Assignment: NanoGene Technologies, Inc.

1. Four scientists and their supervisor founded a company called NanoGene Technologies, Inc. The founders agreed to split the equity equally among the five members and take $120,000 salary each year. As potential venture investors, this decision would concern me, but from the perspective of the founders the decision is understandable.

There are some benefits of equal split - all co-founders feel the equal split was fair and consistent; unequal share of the equity and compensation might complicate relationships and upset them. Co-founders put together $5,000 as a seed fund - $1,000 each to start the company. Unequal share allocation could result in potential conflict among them. With equal share, all the co-founders will be motivated to work hard to pull their weight equally for the company. If they didn’t split equally, there would have been difficulty to credit contribution.

However, there are some possibilities that equal split won’t work. First, each co-founder had varied length of experience, and salary at AMSL and opportunity cost was different for everyone for starting NanoGene. For instance, Masterson had the largest opportunity cost because he had been earning the most, whereas Gary had the lowest opportunity cost because he was earning the least. Second, Tompkins was unanimously voted in as the CEO and leader for NanoGene, meaning he has some natural leadership skills, which should be awarded. Moreover, he took on all the many responsibilities of being a CEO, hence deserved a higher salary and equity split in return. Finally, it will be difficult to understand that who has more say than who without a differentiated split structure.

As a potential venture investor, I would be concerned because of following reasons -

• Tompkins’ equity share and compensation level was below market rates (compared to other VC deals) whereas the VP-level founders’ compensations were above market rates.
• There is a need of clear distinction of who the leader is in a founding team otherwise there is a risk of important decisions getting stalled.
• The five founders is stated to own 3.15% ownership in the company in addition to taking a $120,000 salary. This has made me skeptical as they have stressed that each position requires a different skillset, but their compensation structure is similar.
• All the founders are ex-scientists and have no prior experience of running a company. This may hinder operations and growth of the firms.

2. The team is initially comprised of five founding members:

• Will Tompkins is a 41 year-old Biochemist Ph.D who was working as scientist with the salary of $80,000 at Eastern Institute of Technology’s Advanced Materials Sciences Lab (AMSL). In contrast at NanoGene, he will be the founding CEO.
• Mark Masterson is a senior scientist in biophysics who previously earned $90,000 a year.
• Ravi Rhoota is a senior scientist in the biology group who earns $65,000 per year.
• Gary Garfield is a post-doctoral fellow in biology who earns $55,000 per year.
• Don Ruper is a Director at AMSL who is interested in joining the founding team in a limited capacity working one day a week but has a reputation and resume that can attract additional investment capital.

In addition to the five founding members, below are others (e.g. investors) involved with NanoGene:

• Angel investors: One of Tompkins contacts who was a previously a CEO of a biotech company agreed to invest $600,000 at a $2.25M post-money valuation. After his initial investment during the Angel Found on 6/02 he held 26.49% of the company but would be diluted to 5.68% ownership after an assumed Series A round was raised.
• Venture capital investors will own 61.52% of the company
• Paige Miller, a Harvard Business School MBA, has six years of operational experience in biotech and has been consulting with NanoGene.

At the date of company inception on 12/01, each of the five founders splits ownership equally and retains 20% equity in the company. As additional capital is received, ownership will decrease accordingly. Assuming there is a Series A Round of funding, each of the five founders is slated to own 3.15% ownership in the company in addition to taking a $120,000 salary. Each of the three founding senior scientist, with the exception of Rupert, would be appointed one scientist and two research assistants, and would report directly to Tompkins. Research assistants would earn $45,000 in addition to 40,000 options and junior level scientists would be paid $72,000 per year and receive 60,000 options.