This case study analysis discusses the start-up phase of NanoGene Technologies, Inc., and the decision of the founder on how the equity and compensation should be split up. Besides that, other issues tackled are the hiring processes and the compensation plan, the corporate culture embarked on and institutionalizing it and arriving at the decision on whether to hire a non-founder, senior-level employee and appropriating a salary higher than that of a founder and granting of equity similar to that of the founders.
Michael J. Roberts; Linda A. Cyr
Harvard Business Review (803117-PDF-ENG)
February 24, 2003
Case questions answered:
- Evaluate the founders’ decisions regarding the split of equity and compensation level. As a potential venture investor in NanoGene Technologies, Inc., would these decisions concern you?
- Evaluate the size and composition of the founding team. What is the difference between being a “founder” and an early employee?
- Evaluate Paige Miller as an addition to the team, and assess her compensation demands. Would you hire her on the terms she seeks?
- Assess the company’s progress on each of the specific issues discussed in the last section of the case: the hiring process; a compensation policy; the company’s culture. Specifically, in each of these areas, what should the company do?
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Case answers for NanoGene Technologies, Inc.
Question 1: Evaluate the founders’ decisions regarding the split of equity and compensation level. As a potential venture investor in NanoGene Technologies, would these decisions concern you?
In NanoGene Technologies, Inc.’s current plan, all co-founders receive the same post-Series A financing compensation ($120,000; 3.15% equity). The reasoning behind this split is that all five co-founders were ‘equally important’ regarding the founding process and the company’s success. However, from an external perspective this equal compensation is not understandable and needs to be questioned.
CEO Tompkins takes on the leadership role, that only he is able to fulfill and carries a greater stake in the long-term success of the company. This is shown by him making use of his extensive network allowing access to VC capital and the other co-founders reporting directly to him. Hence, it is reasonable for him to receive higher compensation.
Three factors that should have received greater attention in NG’s compensation plan are the previous contributions, opportunity costs, and expected future contributions of each co-founder.i
Also, the NanoGene Technologies co-founders need to be criticized for making this equity split decision so early. Yet, if Tompkins received a higher compensation all over sudden this could cause problems within the founding team. The company culture was initially built on the principle of equality and changes in CEO compensation would hence likely distort a productive work environment. From a VC perspective, there are several concerns regarding the above decisions.
Firstly, the founding team involving five persons is too large for VCs. Its size makes it difficult for the VC to push through certain decisions, especially if each co-founder has veto rights.
Additionally, a higher number of co-founders makes accountability more difficult, will likely make communication more complex, and generally will reduce the pace at which the company is run. Moreover, a VC will, like we do, oppose the idea that the CEO gets the same compensation as the other co-founders which take on less responsibility. The low equity stake for the CEO makes a long-term commitment on his side less likely, which the VC will evidently be unsatisfied with, given that the CEO should apply a more long-term perspective.
Furthermore, the already low equity stake (3.15%) for each co-founder will be further diluted in future financing. Such dilution will definitely raise concerns by the VC with on whether management and seniors are…