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Advice Needed on Negotiating Stock Options for Medical Consulting Work

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  • Advice Needed on Negotiating Stock Options for Medical Consulting Work

    My husband, Baseballdad94, is a physician who is doing part-time consulting work for a startup medical device company. The CEO/founder would like to pay him for some of his consultation time in stock options. He has done consulting and speaking engagements for this company in the past and has been paid an hourly rate. The founder has stated that he plans to sell the company in the near future - possibly 4-5 years. Since my husband has never worked in the corporate world, we don't have experience in evaluating compensation through stock options. Obviously, his goal is eventually to - at the very least - break even with what he would have been paid with his hourly rate, however, the ultimate goal would be if the eventual compensation was greater than his hourly rate for the total hours worked. His understanding is that the founder currently owns 40% of the company and the remaining 60% is owned by other investors. The company is worth approximately 24 million and is projected to be worth eventually 150 million. He was told to keep track of his hours and at the end of the year it will be converted to stock shares. What are the pertinent questions to ask the CFO and what is the best way to negotiate stock options?

  • #2
    I can't give you solid advice, but that won't stop me... ops:

    Most start-ups don't go public.   9 of 10 fail.   On average, you're better off taking the cash. After all, the CEO is not offering you options out of the goodness of his heart.  He's doing it because it's better for him.  But your husband might know enough about the company to make this a good deal.  But think of it this way:  If he was paid cash, would he then take that cash and invest it in this company?   I wouldn't, because I don't buy individual stocks.  He may think he knows this company well enough to invest, but that's what the Enron employees thought, also.

    If your husband gets stock, it will likely get diluted along the way.  There are also various types of options, and it gets very complicated.   Beware, because, depending on which type of options he gets,  if he takes the options, buys the stock, and then it tanks, he can end up owing taxes on the original amount even if the stock becomes worthless.

    There are a number of books on options, but I don't recall titles and don't remember which ones were good.  You should read one or two before talking with the company.

     

    On the other hand, you can read about this guy.  He took the cash.

    https://en.wikipedia.org/wiki/Ronald_Wayne

     

     

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    • #3
      Agree with AlexxT. I also really dont know squat about these in real life except that they are of course inherently risky and there are many types and it gets complicated. They are lottery tickets, if you dont need the cash flow sure take some, but also, 4-5 years out and a top line market cap of 150 million isnt going to be anything wild. There is obviously a good reason these are offered, it plays on peoples greed and costs basically nothing, if it costs something in the end, thats great because everyones shares are profitable.

       

      Here is an article, but the slide demonstrating how funding and dilution works is very illuminating. http://www.financialsamurai.com/candid-advice-for-those-joining-the-startup-world/

       

      However, if Im reading this correctly the CEO wants to pay him 100% in equity. This would raise immediate red flags to me unless it came from your husband due to the lottery ticket nature and not needing the money since its a side gig. Otherwise, this suggests the ceo thinks hes getting a great deal or the company has cash flow problems. Its sort of win win for the company as your goals are aligned, but on the other hand its more dilutive if you believe your company to be going in the right direction and I wouldnt just be handing shares out if I did. idk obviously, just cynical.

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      • #4
        Agree with others - this is highly speculative and unlikely to pan out. But, then again...

        Stock options are complicated and I doubt they are able to put a fair value on the stock price. Even established companies' stock values fluctuate from day to day, often wildly. It would be really difficult to put a fair value on what your husband is getting paid based on the value of a tiny company (yes, $24M is tiny for a business that might go public).

        I'd recommend the bird in the hand. If he wants to participate, take a few shares, but no more than 10% of hourly pay.
        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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        • #5
           

          [duplicate post deleted]
          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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          • #6
            Thank you all for the thought-provoking comments.  Many factors to think about and consider.  We are sifting through all of this and the Financial Samurai link that Zaphod provided which has great questions to ask.   My husband will still get paid his hourly rate or daily rate for traveling speaking engagements and meetings and then some of the consulting work will be compensated with stock options. I told my husband that he needs to think of this portion of the work as basically volunteer work so as long as he is okay with that, that's his choice. He enjoys the work and finds it stimulating and really believes in the product and company.  As another piece of background info: the company has already been approached to be bought out by a major medical technology company, however, the founder wants to grow the company as he has patents on 2 additional products besides the original device.  Incidentally, my husband who is an energetic talker who loves to throw out ideas basically gave the founder the ideas for these products in a meeting without thinking through the fact that this was intellectual property and should be compensated!  ops:  This is why physicians should have business and finance classes!  :roll:

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