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As originally asked by Giovanni Lauricella.

Startups generally have two ways of compensating their employees… base salary and equity. Though it depends on the character of the individual (hungry, flexible, embraces risk vs. needs stability, immobile, risk averse), startups brand their compensation structure after making numerous hires. Some have ample financing and can afford paying a higher base (but don’t give as much equity) and others who are short on cash dish out higher percentages of equity with lighter base compensation.

In your opinion, what is the best motivator to retain qualified employees in a startup that will keep them loyal to the company and remain happy from a personal as well as professional perspective?

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Burrell (Bo) Clawson
I research patents & design products to get a patented competitive position: Over 30 patents.
Different startups have different needs:

1. Drug Development = high degree of difficulty & time

2. Surgical implant = moderate level of FDA clearance trials

3. 510(k) simple hardware (non-implant) = least time, effort/difficulty

I can recognize each of the 3 different types of products need a different type of staff to get it approved and then to market.

To control risk, I have dealt primarily with simple hardware external to the patient in respiratory disposables and now a simple diagnostic kit.

Gary Rosensteel
Business Therapist, NuCoPro
First, Rabia, your post has ABSOLUTELY NOTHING to do with the thread of this conversation, and even worse is in NO WAY applicable to startup companies. Try reading things before you jam in an advertisement.

Now on the matter at hand. There has been some mention of using consultants, and I wanted to ‘expose’ our company model, which is primarily virtual. We have executives on board to run the company, product development, sales & marketing and operations, while everything else is handled by a highly qualified team of experts – engineering firm, product design firm, regulatory & quality control firm, consulting clinicians, consulting subject matter experts, contract manufacturing, warranty & service firms. This provides us with top-of-the-line expertise at tightly controlled and reasonable rates. Plus, in the most important areas, having a business firm responsible, which removes most of the risk of personnel loses.

We decided at the beginning of our ‘journey’ that the virtual model was the best to reach our objectives quickly with lowered OPEX. This isn’t going to work for everyone, but we are fortunate to have assembled a great team who really believes in what we are doing and feels ‘invested’ in our success – to the point that some of the players have swapped part of their service fees for equity.

DR. MICHAEL WARD
Global Director, Clin/RA/Pre-Clin, at MicroPort NeuroTech (Shanghai)
Now that this very interesting discussion has had a commercial break of no relevance to the topic, I will try to put us back on track with a response to Arlen – MDs clearly have a role in the evolution of a product/start-up company. The experienced ones can contribute a lot to the company’s understanding of clinical practice, patient needs, and gaps in therapy. As KOLs on a company’s SAB, they should be recognized for the latter but, with few exceptions, noted as limited in their awareness of regulatory requirements and approaches.

As one who often looked to highly respected physicians in clinical protocol development, I found that discussion rather than asking them to edit a draft protocol (except for clinical methods section) works best because the academic protocol differs considerably from the company-sponsored one. arlen mentioned some critical functions an MD can provide, especially in his/her interface with other physicians. Much of this can be done by using these MDs as consultants. Start-up companies don’t usually staff Medical Affairs as a full-time function.

One thing to note for those anticipating joining a start-up – if the founder is an MD who just left clinical practice to pursue the commercialization of his/her invention, that’s a red flag, unless that person is humble enough to admit he/she does not know much about the regulatory process and regulated trials and knows even less about hiring CROs. With such an admission and if people are on board who compensate for these limitations, it may be a viable option.

I realize this is not a discussion of compensation approaches but the issue of hiring MDs was brought up. Todd pointed out that my experiences would have been no different regardless of cash reserves or other financial considerations. I am not sure I fully agree because the failures were due to overspending – in the wrong areas. On the one hand, they were tight with compensation (a factor that led to poor hiring practices); on the other hand, they squandered the available cash on ill-advised pathways, which strayed from the main focus. So, restricting reasonable and balanced compensation to allow reckless spending in other domains led to bankruptcy. Had there been more cash, one or more of these companies would have survived long enough to complete the clinical/regulatory pathway.

Arlen Meyers, MD, MBA
President and CEO, Society of Physician Entrepreneurs
In general agree, but consider that several physician entrepreneurs add value in areas other than product development and market insight. For example, helping to raise early stage seed money from high net worth networks, contributing to business strategy and execution, identifying strategic partners, serving as KOL’s to help promote awareness and support sales and marketing and other roles. As you noted, when it comes to docs, one size does not fit all.

James Lee
Sr Staff Engineer at Qualcomm
Hi All,
In my previous post I broke down hiring and retention as two ways to look at compensation. I also broke out sales folks. In this post I will break out different job roles.

In reading the other posts, its clear that people from different backgrounds are invested differently in the process and some may be looking for a one size fits all solution. It’s also clear to me that the MD’s have a significantly different perception. So let’s break it down to different roles and how to compensate and retain and when to not retain and only use consultants.

MD’s: In this thread they are most in favor of using consultants, and thus they should be consultants. They are the end customer and target market and should be consulted with to define product requirements and desires. There is little need for the company to be heavy with full time MD’s on staff.

Sales People: These are critical once you have a product to sell. They are used to working on commission. Set targets and commissions properly and you are set.

Marketing people: You need these guys to help define the product and solicit input from many target customers and create market demand for the product as it is becoming ready. They can also help line up clinical trials. Compensate them with bonuses (or equity if there is equity to share) for hitting targets and milestones. You may be able to use some outside consultants for some of this work, it’s a balance.

Administrative staff: You need some administrative staff, you can contract out others, for example, my consulting firm used outside CPA’s and did not have a CFO. However you will need some staff to keep the wheels moving and keep track of critical information. Look at the position and the person and motivate them as needed. Key executives should be deeply invested with equity and if the believe in the dream, little cash compensation. On the other hand an administrative assistant who tracks may desire more cash and less equity. A coordinator of clinical trials should get compensated for success measured in key metrics of the clinical trial (not the outcome, but # of physicians and participants, key filings, etc).

Engineers: These are the people who take the dream and make it a reality. They need to be compensated with going rate base pay and have an upside in the equity since you want them to want to make the product work. Hire key senior people and let them determine if you should use consultants for specialties.

My bottom line. Don’t use a one size fits all compensation plan. Know when motivates each type of person in the company. Hire the key people. For example don’t try to manage an MD and engineers the same way you will alienate one or both of them.

Burrell (Bo) Clawson
I research patents & design products to get a patented competitive position: Over 30 patents.
Todd Staples got close to what I consider key when he stated “those companies all made huge mistakes in hiring the wrong people”.

If there is one word I would like to see used to judge everything against it is “Reality”.

Whether it is the concept, prototype, CEO, mfg. costs, time, FDA, trials, patents, competition…everything needs to be based on what is Real.

Sometimes Real is “we don’t know and need to find out” or “it is possible but we don’t know how long or how much” and other times “he has never done that job before.”

Real counts.

DR. MICHAEL WARD
Global Director, Clin/RA/Pre-Clin, at MicroPort NeuroTech (Shanghai)
Having been in 3 start-ups, each of which went out in a blaze of fire (bankruptcy), I am not pursuaded that compensation schemes make a difference. In my experiences, overspending (not on compensation) and ‘hairbrain schemes’, 2 of which were spawned and sold to the decision-makers by the respective company’s CEO, generated early failure. In all 3 the products were robust and at least 2 could have enjoyed considerable market success.

I believe employee selection is the most critical aspect of start-up success and not compensation schemes. If the company focuses on compensation, the awareness of limited cash drives those who decide on new hires to look for ‘good deals’ rather than ideal employees. The best idea suggested in this discussion was to bring in new employees after initially hiring them as consultants. This approach has the following benefit:

The newly hired consultant can now delve into the technology in development, the quality and capabilities of other team-members, the culture of the company, and other key elements to success. In no way could a person really understand these critical parameters on the basis of a few interviews. Even being shown some confidential information (after signing a non-disclosure agreement) does not help a lot. I have been there many times and know that the hiring person(s) carefully edit what they show….only the best data and outcomes.

The last company I joined as Clinical VP is a good example of employee and CRO selection pitfalls. I was blinded by such exciting technology and I knew it would be successful in a market poorly served by one product. This blinded passion for the product and the exciting challenge of a start-up environment led to my immediate hiring. Certainly nothing was wrong with the compensation package.

No sooner had I stepped through the doors on my first day than I realized the company was in big trouble. The 5 members of the leadership team knew no better so they did not purposely fail to disclose what I needed to know, prior to my being hired.

The product was great but the pivotal clinical trial (designed and managed by one of the biggest global CROs) was highly flawed with questionable subject enrollment processes, highly skewed differences between test and control subjects, and SAEs not identified or reported. This trial was stopped. FDA was immediately notified of these transgressions and a clinical/regulatory salvage operation was initiated for several months.

In the end, the pre-clinical studies had to be repeated (wrong tests/wrong CRO/non-GLP etc) and a new IDE trial was designed and initiated. This is just one example of this company’s personnel deficiencies. Not only were the Founder (an MD), the President (founder’s wife who was an artist), and the CEO highly inexperienced in running a regulated organization but their employee selection approaches were governed by irrelevant and weak acceptance criteria for hiring into critical positions of a start-up. The VP and Director of Marketing were the 4th and 5th hires – for appearances sake. For the first 18 months of their tenure, they had virtually nothing to do. I just don’t see how reasonable compensation schemes can bring down a company; I do believe that flawed hiring practices will lead to early failure.

Michael Hortiatis
President, FrozenPhoenix LLC
Startups are risky and few are successful. However the question is compensation to retain employees. Perhaps Giovanni can let us know at what stage is this startup:
– idea
– pre-seed (all the stages but most don’t have staff)
– in production
– established and scaling up
Compensation strategies and available resources critical factors.

Todd Staples, MBA
Account Representative, GYN at Medtronic
Dr Ward I can understand why you feel that way with your experiences! I agree that the right people was presumed in the conversation thread, how to hold onto them and ensure their full attention and devotion to the task and to the mission can be related sometimes to their compensation. Take the $ out of the equation and the situations you went through would still have happened because those companies all made huge mistakes in hiring the wrong people, which ultimately brought them down. Best of luck to all in 2013.

Arlen Meyers, MD, MBA
President and CEO, Society of Physician Entrepreneurs
Agree. For startups, it’s about heart and passion. Hire based on passion for the idea, risk tolerance, connections to help achieve the next critical success factor and can you play nice together. The money will follow.

Gary Rosensteel
Business Therapist, NuCoPro
Bo, how right you are! Following the discussion thread, I thought it would be good to clarify that my comments pertain to very early stage startups with only a few employees. When a startup progresses to having to bring in more significant numbers (20, 50, and beyond) the compensation ‘model’ has to evolve.

Burrell (Bo) Clawson
I research patents & design products to get a patented competitive position: Over 30 patents.
Another wrinkle: Some startups are doing simpler projects that will get to market in a few years and the exit strategy comes in soon.

Some startups in a highly technical arena requiring 3 clinical trials may go 7-10 years if they finally get to market, let alone see a cash out. It is much riskier & ties up a significant portion of a person’s working lifetime. Is it the extreme risk taker the one who takes these jobs?

I don’t pretend to know the answers, but I know the risk differences for both the company and the people are higher in those longer startups.

James Lee
Sr Staff Engineer at Qualcomm
Hi All,
In reading this thread, there are a few competing ideas and it would be best to separate them.
Idea 1: In the headline of the post: retain good employees to get over the finish line.
Idea 2: Throughout the posts, attracting and hiring the best professionals.

I will briefly address each of these.

Retention: The best strategy is just good management. Don’t lead employees on saying that an equity event is 6 months away every 6 months, you will lose credibility and trust with the employees. Be honest and strong in the communication about significant events: Funding, FDA approvals, clinical trials, equity events, etc. Remember to praise good employees for their work. They may work harder and more hours for less pay with more positive feedback. Too often executives and the management chain forget this basic technique for motivation and retention. If you have existing employees and you want to retain them and you can’t afford raises, praise and equity are the key. Remember that the older employees see their equity diluted with each new round of funding and new hires. Refresh their equity to keep them motivated.

Hiring: If you think you can hire an A+ player employee at 20% less than market rate you are most likely mistaken. There are some serial start-up junkies who will work for mostly equity, but they don’t last long. Sure you need people who can buy into your start-ups vision, but you get what you pay for when you underpay employees. The hiring package should be competitive on base salary. The equity should be for long term retention.

A few final thoughts: Some of the prior posts talked about sales. Sales folks are typically coin operated. They should have a base + bonus (commission) structure based on the sales they bring in. My primary comments were for the technical non-commissioned folks such as researchers and engineers.

Arlen Meyers, MD, MBA
President and CEO, Society of Physician Entrepreneurs
Partly depends on whether you are talking about full time employees, advisors, management team or board of directors. As someone who works with several early stage biomedical and health companies and created a few companies, some points:
1. Best to pay for performance, not effort, whether it be cash or equity
2. Try before you buy. Hire people and advisors on a trial basis, work on a time-defined pilot program or some prototype benchmark, and see if you want to continue dating after that.
3. Hire people based on their passion, connections, and expertise to help you achieve your next critical success factor.
4. As the company grows, you will need different people with different skills to get you to the next level. Have a plan to get rid of the advisors you no longer need.
5. Give away as little of the store as possible.

Cliff Kline
Vice President, Clinical and Regulatory Affairs at neXimetry
Working in a start up right now, I can say that we do not pay market-competitive salaries, but all employees get significant equity. If the company provides lower-than-average salaries, the only way to get quality employees is to provide significant equity in the company.

Michael Hortiatis
President, FrozenPhoenix LLC
Good comments from both Gary and Todd. The corporate world provides safety nets and resources not available to start ups (this can also occur in the corporate world, too; how many have been given a limited budget, small staff and a huge challenge!). Start ups need teams that are able to work together, redirect their attention at short notice and pitch in to solve problems.

Todd Staples, MBA
Account Representative, GYN at Medtronic
@Gary- this too has been my experience. The last thing a start up needs are people looking for a “job”. What you need are people who will join your cause and fight along side you in the tough times with the carrot at the end of the road. Start ups are definitely not for everyone no doubt about it.

Gary Rosensteel
Business Therapist, NuCoPro
Have to disagree with Kobi. First, being a startup you usually are desperately trying to conserve cash and one way to do that is to pay less than market rates, but with a nice equity kicker. Second, if someone needs a larger salary to come on board they are NOT ‘invested’ in the success of the company and may well NOT put in the extra effort required.

Kobi Shoham
VP Engineering and Manufacturing at Medinol
In my opinion the base salary is the most important factor,
Each employee that is living in the world of start ups knows that equity is nice to have but this paper has still long way to become cash
The startup should pay a base salary that is a bit higher then average for the specific position and should give equity in a way that if you stay longer you get more ,those two together are giving the employee the fuel to keep going.

Gary Rosensteel
Business Therapist, NuCoPro
I’ve seen way too many cases of people trying to leave the corporate world for a position with a startup, only to fail miserably because they don’t ‘get it’. They have no understanding that the startup environment requires (actually demands) a constant, whatever it takes, approach to everything. They feel they are above ‘working in the trenches’ and that their job is to come up with ideas for others to implement.

Not always so, but it is very, very hard to make a smooth transition from corporate to startup executive. My experience is that it is better to take someone who has startup, but not executive experience, and coach them into being an executive, than to try to ‘retrain’ a corporate executive into the startup world!