Startups are all the rage these days, particularly in healthcare. In Q4 of 2022, more money was invested into healthcare than any other industry category (with information technology a close second).
Perhaps one of the most shocking things is that many of these companies do not have physicians or other clinicians in their leadership, or sometimes even anyone with significant experience in the healthcare space. As someone who sees a lot of suboptimal startup ideas with minimal product market fit on the problems they claim to be solving, I am constantly advising startups to get clinician input early on in the process. In fact, many of the projects we provide members on our consulting database come from startups that are looking to get feedback from clinicians. As physicians, we are in a unique position to know what products will move the needle, where there are gaps in innovation that need to be addressed, and where practical considerations preclude potential solutions from being effective.
This page goes over your responsibilities as a startup advisor, what you need to be asking when considering a position, and compensation.
Disclaimer: We are not lawyers and this is written based on our experience and the experience of those on our communities. Please double check with appropriate legal expertise before making decisions on the basis of this piece.
What Is a Startup Advisor?
The line between advisor and consultant can be blurry, so on questions in the communities, they are sometimes discussed interchangeably. Typically though, consultants have a more defined role where they are brought in on a limited time basis to answer a specific question, and they are usually paid on an hourly or per project basis. Advisor roles are typically ongoing roles and you are usually found specifically because you have a skillset, qualification, or brand that fits the startup’s needs, whereas consultants can be hired more generically. Responsibilities and compensation for consultants versus advisors can be very different, so it’s important not to confuse them. For example, while you may get paid $1000/hour for a consulting gig, you likely won’t get that in cash per hour upfront as a startup advisor, but it may end up being way more than that in retrospect if your equity converts.
There are different categories of advisors. Generally the most ‘official’ role as an advisor is being on a board with voting rights along with other directors. Note that when many physicians say they are on an advisory board, these are not positions with voting rights where they officially help make decisions on behalf of companies. Rather, they are generally positions where they strategically advise the company on the direction of the company or assist them in other ways. Accordingly, this article will refer to startup advisors as general advisors or as physicians on advisory boards, rather than members of the board of directors with voting rights. If you do happen to be looking at the more official type, note that there are many more legalities and potential liabilities associated with these positions that you should be aware of, and even more due diligence should be done prior to accepting those roles.
Why Be a Startup Advisor as a Physician?
There are many ways to be involved in innovation as a physician, including attending relevant conferences, starting your own company, or providing consulting. One exciting way is to serve as an advisor for a company. This gives you a wholistic view of where a company is and where its going, and the ability to regularly help shape a solution or service and contribute to the field. I have found that many physicians find this work exciting, as it gives them an opportunity to use their medical knowledge in a new way, and have an inside scoop on what’s coming down the pipeline. It’s definitely a fun side gig, and an interesting way to potentially capitalize on significant upside if the startup you’re advising makes it big (assuming you’ve been granted some equity or upside for your role).
It’s also an honor to be asked to be an advisor, as it recognizes your role as an expert in a field and establishes your position as a thought leader. It’s a wonderful way to grow your network within the field. Often, these positions can lead to other unique opportunities, such as speaking roles, other advisory boards, consulting projects, or other opportunities which leverage your brand as a subject expert.
What Does Being a Startup Advisor Entail as a Physician?
Every advisor role is different in terms of the number of hours asked of you, the depth of involvement, and the scope of services you provide. Some companies may want to meet with you for several hours a month, while others may just require a quarterly check in or phone call. Generally speaking, though, it means that you will make yourself available to weigh in on things where the company feels you’d have unique, helpful advice, expertise, or connections. In some cases, they will want more than that. They may want to use your likeness or name for media or publicity, ask you to provide quotes, or ask you to create content. They may want you to spread the word about what they’re doing to your networks, or help forge relationships that would benefit the company’s business plan. Make sure that both parties have a good understanding of what you have and have not agreed to from the getgo. It’s important not to accept a role unless you truly have the bandwidth for it. These companies are counting on you, and the healthcare start up world is smaller than you think. In my opinion, it’s better to pick a few companies and advise them more intentionally (hopefully also with more compensation or upside) than to spread yourself across many different boards.
You should not be afraid to give your opinion, even if it goes against what the company’s thought process is. They brought you on board for your expertise, and you should weigh in accordingly.
How Do I Get These Roles?
Honestly, most of the time, these roles will come to you, because of a brand you’ve built, some specialized expertise that you have, or a connection in your network, rather than you actively seeking out these roles. You can definitely help people find you by making it known that you are open to these positions amongst your network, and continuing to build a brand. Going to health tech, startup, and other industry conferences outside of your typical society meetings will also help you to network with people in these spaces.
What Do I Need to Ask or Know Before Saying Yes?
First and foremost, make sure that you 1) believe in what the company stands for and is trying to achieve, 2) that you like and trust the team at the startup. If the answer to both of those questions is not yes, you should not take the role. Your name and brand are going to be associated with this company, the product, and the people, and it's hard to put a price to that. Also, remember you want to enjoy this side gig, not dread working with them.
If you are employed by someone else, make sure you check what your contract to see what you are and aren’t allowed to do. This is especially true if you work for an academic medical center or a government entity, but nowadays, hospitals or even private practices may have some policies about this, especially if there is a conflict of interest or the role may require days off for travel or otherwise affect the amount of time you have to give to your primary job.
Always ask about the need for insurance (usually E/O insurance), and consider any liability that may be associated with your role.. If you are in a position where you are in a publicly traded company and have voting rights, this can be very important, as you have a real say in what the company does and therefore can be legally held responsible for its actions. If you are going to take on a position as a voting board member of a publicly traded company, we highly recommend getting legal council, as there are many more nuances to these positions. If there is an indemnification clause, pay attention to it. Ideally if you are sued because of your role in the company, the company will pay all your legal charges.
Many advisory boards, especially if at a later stage startup or publicly traded company, will require that you get a background check.
What Should I Look For in My Contract or Startup Advisor Agreement?
Typically, your agreement will outline what you’ve agreed to and your responsibilities as an advisor, some form of a confidentiality and nondisclosure agreement, often a waiver of rights to intellectual property that you co-create, and of course, the compensation. There will likely be lots of legal jargon, and if you are at all unsure about what it means, ask lots of questions and consult your own attorney. If you are being compensated with equity, there will be language about what qualifies you for equity, the vesting schedule (on what terms/time frame you earn your equity), and what types of share you are getting.
We plan on doing a separate article about this as it’s complicated and merits more discussion, but in the meantime, there’s been a lot written about these agreements on the internet and you should definitely take the time to talk to other physician advisors about dos and don’ts. Feel free to ask in the communities!
How Should I Be Paid?
This is a complicated one. Every company will be at a different stage, have different budgets or allocations for this role, and have different expectations of what you have to do to receive compensation.
Typically, startups will compensate in cash, equity, or some hybrid thereof. The most productive agreements generally give you as the advisor some share in the upside, as they want you to be incentivized to want to make their product or service successful. Giving that share gives you skin in the game. It’s also one of the most reasonable ways for a startup to afford physician expertise, as our hourly consulting rates tend to be high and most start-ups are strapped for cash until they’ve reached later stages of funding.
Categories of Equity - Restricted Shares Versus Stock Options
Let’s talk about equity and stocks. Most startups will offer you restricted shares (given to you, can be restricted stock units or restricted stock awards) or stock options (a right to purchase), both of which will likely have vesting requirements. This means you will be given them either gradually over time or after a certain period of time providing services to the company (or in some cases, after hitting a certain performance milestone).
Restricted stock awards can give you shares and voting rights immediately, and possibly even dividends, but if you’re not vested in them, the company may have the right to buy them back if you no longer perform services for the company. They may also not come with voting rights. The value of these is whatever the fair market value is. For restricted shares, gains are taxed as ordinary income in the year that they are vested, unless there is a specific election (beyond the scope of this article)
Stock options, on the other hand, give you a right to buy an amount of shares at an exercise (or “strike”) price in the future, usually at the time of a capital event. The value of these is essentially the difference between your strike price and the market value when you’re allowed to exercise them. So for example, if your company IPOs at a price much higher than the price that your strike price is at, you may choose to exercise your options and get a windfall, or you may want to hold on to the stocks. Often times there is a waiting period after an IPO for when you can sell them to provide some stability post IPO, so be mindful for the conditions.
There are two types of stock options, non-qualified stock options (NSO) and incentive stock options (ISO). Taxation differs for each, which is important. NSO shares are taxed (for regular federal income tax purposes) as ordinary income when you exercise them on the difference between the exercise price and the fair market value on the day of exercise, regardless of whether you keep or sell them. ISOs are more complicated, but in ideal situations, advantageous in that they are not usually taxed until you sell or otherwise dispose of your shares, allowing them to be taxed at long term capital gains (or sometimes according to the alternative minimum tax).
Stock options are riskier than restricted stock awards, as the restricted stock awards should always have some market value (assuming the company doesn’t go bankrupt), whereas stock options require the value of the shares to go up to make it worth it for you to decide to exercise your stock options.
How Do I Know if What I’m Being Offered Is Fair?
From your perspective, the thing that will likely matter most is what % of the company you own at the time of the sale. The way that you determine this is by how many shares of the company that you own relative to the total number of shares out there. This is more complicated than it sounds.
From the very beginning, when a company incorporates, the lawyer will usually decide an arbitrary number of shares that the company has. These shares are subject to being cut up in different ways to create new slices to give out to potential investors and employees.
Then at each funding round, there is a complicated process where the company and investors basically negotiate what each share is going to cost them, and that essentially determines what each share is going to be at that time. This will be subject to change every time that the company raises capital.
There are lots of nuances to this that are pretty arbitrary, as the investors and the company create rules about which shares have to be paid out first, discounts on common shares, rights associated with investor shares (usually more than the common shares), etc.
Every time there’s a new round of funding, a new valuation is set. This means that the shares could be worth less the next time money is raised if a company isn’t doing well.
Ideally, you are able to track how many shares out of the total shares out there you have, to assess the value of your shares based on the company’s valuation at that time. While a company is actively raising, they may not be able to give you an accurate valuation, but it would still be helpful to understand how many shares are currently outstanding and how many of those shares you’re being issued, so you can have a rough idea of what piece of the company you are being offered. The later the stage of the company, the less likely you are going to get a significant chunk of the company. We often see posts on the group where people are asking about what share of the company they should ask for. This is going to be very different depending on if a company is new (you should get a bigger percentage) or if a company has already finished multiple rounds of funding and is closer to IPO.
Being an advisor can be an exciting way to influence the future of a company and ideally make an impact on a larger level. If the company does well, it can be quite lucrative. Make sure you enter the agreement with a clear understanding of your role and your compensation, and don’t be afraid to ask questions or ask for modifications. As always, review everything with an attorney to be safe. Good luck!