This is part 3 of our series written by legal consultant Beth R. Jacobson, PLLC, entitled The Biggest Mistakes You Can Make When Negotiating a Consulting Arrangement with A Pharma/Biotech Company. Today’s section will cover Pitfall Number Two – Agreeing to Below Market Compensation.
After reviewing information about the company and finding everything in order, the doctor agrees to the compensation offered despite the fact that the company’s publicly filed information and other similar companies’ publicly filed information clearly show that consultants with his background typically earn $5,000 per month plus options. The doctor asks the management of the company over lunch if they can come up on the compensation and they say let’s start here and see how things work out and they’ll think about the options as the company gets more successful. The doctor doesn’t want to appear pushy so he accepts $2,000 a month and no options. He rationalizes his actions by thinking that he can really use the additional $24,000 per year and these guys are very friendly – maybe I’ll get more another time.
Wrong! Do not accept below market pay. First off, these people, while appearing friendly, are NOT your friends and are NOT looking out for your best interests. In fact they will get complimented back in the office for getting you so cheap. You are unhappy, despite your rationalization described above, because you know that their other consultants are getting twice as much as you plus options and you know your time is worth more than what they are going to pay you.
A better approach would have been to say that your time is worth more than that, that you know that their other consultants get paid twice as much plus options and that you expect to be treated as a member of the team with the same benefits as other doctors doing similar work for them. Most likely they will agree to your terms because they are reasonable and the money and options were there for the asking. But like in any negotiation, their mentality at the start is why offer someone more than they may agree to accept. In this situation, they thought they could get you cheap; they thought they’d give it a shot and are very happy they did it.
It is crucial that you get the options priced as of the day you sign up with a company not in the future after what you have worked on becomes a success. Getting stock and/or options from a company can be a “sweetener” for your package with a public or private company as well as providing potential significant upside. The upside will obviously be more if you receive the options before the value of the stock goes up significantly. For example, if you are given 50,000 options at a price of $5.00 and a company becomes “successful” and the stock goes to $25.00, you have just made $1,000,000 plus your cash piece. Imagine how you would have felt if you waited to get options at a price of $25.00 knowing you could have gotten in when the price was $5.00.
To access the other parts of this series, please select the links below.
Part 1: Introduction
Part 2 : Pitfall Number One: What Do You Know About This Company?
Part 3 : Pitfall Number Two – Agreeing to Below Market Compensation
Prepared by BR Jacobson, PLLC
If you have any questions regarding the topics discussed above or if you would like further information about BR Jacobson, PLLC, please visit their website at http://www.brjacobson.com/ or send an email to beth@brjacbson.com.
