The unique compensation needs of biotechnology start-ups

Executive compensation guiding principles: Chapter 4

June 26, 2018
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By Hemant Patel and Don Delves

Designing effective compensation systems at rising biotechnology companies must reflect many challenges, including volatile stock prices, a shifting ownership base that includes founders with large equity ownership and a heavy reliance on stock options as long-term incentives. This chapter describes the application of the overarching and operating principles of executive compensation (EC) at biotech companies using the example of BioCore, a fast-growing, U.S. biotech company that offers promising gene-therapy compounds. To redesign the company’s incentive system, senior management sought to balance and maximize alignment and engagement by offering incentives with a large, relatively stable upside that reflected stock-price swings, the ongoing need to attract strong talent and the challenge of evolving with a growing company facing increased leadership, regulatory and other challenges.

What makes biotechs distinct?

This chapter focuses on biotechnology businesses, especially early-stage, pre-revenue entrants with less than 500 employees and offerings in phases one, two or three of the product development process. They could be pre- or relatively recently post-IPO (in the last one to five years), and typically have venture capital (VC) backing and VC representation on the board and/or compensation committee. Their objectives in most cases are either to “get to commercial” by themselves, which usually requires an IPO or other financial backing, or to be acquired by a larger biopharma company.

When designing or modifying executive compensation systems, biotechnology companies are often the exception rather than the rule, as best-practice or market-typical program designs and mechanisms in other industries or organizations are either difficult to implement or simply not appropriate in an early-stage biotech environment.