How does startup equity work?

Startup equity, in plain terms (and why medtech is different)

Equity is ownership in your company, usually represented by shares. If your company has 10,000,000 shares outstanding and you own 2,000,000, you own 20% (before considering any additional shares that might be created later).

Equity matters because it determines who benefits if the company is acquired, goes public, or pays dividends (rare for startups). It also determines control (voting) and economics (who gets paid what, and when).

Medtech and digital health make equity trickier than many software startups because timelines are longer and more capital-intensive. Regulatory work (FDA 510(k), De Novo, or PMA), clinical evidence (often IRB-approved studies), reimbursement (CPT codes and payer coverage), and hospital procurement cycles can extend the path to revenue. That means you’ll likely raise more rounds, which increases dilution (your percentage ownership shrinking over time).

The cap table: the scoreboard of ownership

Your cap table (capitalization table) is a spreadsheet listing who owns what: founders, employees (options), advisors, and investors. It typically includes:

• Common stock: usually held by founders and employees.
• Preferred stock: usually held by investors; it often comes with extra rights.
• Option pool: shares reserved for future employee equity grants.
• Convertible instruments: SAFEs or convertible notes that may convert into shares later.

Two key concepts:

• Pre-money vs post-money: “Pre-money valuation” is the company value before new investment; “post-money” is after adding the investment. This affects how much of the company the investor gets.
• Fully diluted: ownership assuming all options and convertible instruments become shares. Investors often negotiate based on fully diluted numbers.

How founders typically split equity (and what to watch in medtech)

Founder equity splits are part math, part psychology. A common mistake among clinician-engineer teams is splitting 50/50 “to be fair” without defining roles, time commitment, and risk. In medtech, the workstreams are often parallel and long: regulatory strategy, QMS (quality management system), clinical evidence, reimbursement, and go-to-market into hospitals.

Use a role-and-risk lens

Consider these concrete factors when splitting:

• Time: Who is full-time now vs “nights and weekends” for 12–24 months?
• Cash risk: Who is funding early prototypes, legal, or regulatory consultants?
• Critical path responsibility: Who owns FDA pathway strategy (510(k) vs De Novo vs PMA), IRB study execution, or hospital pilot access?
• Replaceability: Is one founder uniquely positioned (e.g., key KOL relationships, proprietary IP, specialized engineering)?

A practical approach is to agree on a split, then protect the company with vesting so equity is earned over time.

Vesting: the rule that prevents “dead equity”

Vesting means you don’t truly own all your founder shares on day one; you earn them over time by staying and contributing. The standard structure is 4-year vesting with a 1-year cliff:

• 1-year cliff: if someone leaves before 12 months, they typically keep 0 shares.
• After the cliff, shares vest monthly or quarterly until year 4.

Why it matters in medtech: regulatory and clinical milestones can take years. If a founder leaves after 6–12 months but keeps a big chunk of equity, it can block hiring, fundraising, and morale. Investors and experienced board members will push hard for vesting.

Also consider IP assignment (everyone assigns relevant inventions to the company) and reverse vesting (the company can repurchase unvested shares if a founder leaves). These are standard legal mechanics, not insults.

Dilution: why your percentage shrinks (and why that’s not automatically bad)

Dilution happens when the company issues new shares (usually to investors or the option pool). Your share count might stay the same, but the total shares increase, so your percentage decreases.

Example (simplified):

• Founders own 100% at incorporation.
• You create a 10–20% option pool to hire talent (your ownership drops proportionally).
• You raise a seed round; investors buy, say, ~15–30% (varies widely).
• You raise Series A/B later; each round can dilute existing holders further.

Dilution is often worth it if the new capital increases the company’s value by more than the ownership you give up. In medtech, capital is frequently needed for:

• Design controls, verification/validation, and building under a QMS
• Clinical studies (often IRB-approved) and evidence generation
• Regulatory submissions (510(k), De Novo, PMA) and post-market commitments
• Reimbursement strategy (coding, coverage, payment) and hospital procurement readiness

Option pools: the “invisible dilution” founders forget

Investors often require an option pool to be in place before they invest, which means founders absorb that dilution. If you don’t model this, you can be surprised by how much you give up.

Investor equity terms you’ll hear (translated)

When investors buy preferred stock, they may negotiate terms that affect payouts and control. Key ones to understand:

• Liquidation preference: investors may get their money back first (often as a multiple of their investment, terms vary) before common shareholders receive proceeds. This matters a lot in “okay” exits.
• Participation: in some structures, investors get their preference and then share in remaining proceeds. This can reduce founder/employee outcomes.
• Anti-dilution: protections if the company raises later at a lower valuation (a “down round”).
• Board seats and voting: who controls major decisions (new financing, CEO hire/fire, M&A).

None of these are inherently “bad,” but they change the economic reality of your equity. A founder with 20% of common stock may receive far less than 20% of exit proceeds depending on preferences and the cap table.

Equity for employees, advisors, and clinicians (KOLs)

Startups use equity to attract talent when cash is limited. Common instruments:

• Stock options: the right to buy shares later at a fixed strike price. Options usually vest over time.
• RSAs/RSUs: restricted stock awards/units (more common later). RSAs are sometimes used early for very early employees.

For medtech, be careful with equity for clinicians and hospital-affiliated advisors. You must consider:

• Conflict-of-interest policies at hospitals and universities
• Compliance around referrals and purchasing decisions (get qualified legal advice)
• Transparency in publications and clinical studies

Equity can be appropriate for true advisory work (strategy, study design input, introductions), but structure it cleanly with written agreements, vesting, and clear deliverables.

What to do next

1. Build a simple cap table model (founders, option pool, expected seed round) and view it on a fully diluted basis.
2. Set founder vesting (commonly 4 years with a 1-year cliff) plus IP assignment—do this before fundraising.
3. Decide your likely FDA pathway (510(k), De Novo, or PMA) and map the funding milestones it implies; longer pathways usually mean more dilution.
4. Plan your option pool intentionally: list the next 6–10 hires and estimate equity ranges so you’re not guessing during a term sheet.
5. Pressure-test investor terms (liquidation preference, participation, board control) using a few exit scenarios to see what founders/employees actually receive.