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How much equity for a consultant who also needs to be paid?

I have an invaluable consultant who has been helping me envision and source my product and product work. We've reached a point where we need to discuss an equity stakein exchange for a reduced hourly fee, to ensurehis continued participation. I would be lost without him. What guidelines, rules of thumb, models, or advice might you offer?


Thanks so much in advance, all.

23 Replies

Max Loukianov
1
0
Max Loukianov Entrepreneur
CTO and Co-Founder at Gimme!
Allison,

I've been on the other side of the fence (a consultant); I would say it depends on the stage your startup is in, on whether a consultant will get founders stock with the same liquidation preferences as the founders, on how close you are to a funding event, etc. Probably can give you a better idea if you can provide more details - here or just PM me.

Hope this helps,
-- Max
Pulak Kanti Bhattacharyya
2
2
Project Lead at L&T Technology Services
I think while doing a venture you should not be dependent on someone such that without him/her your business will be stopped or you will be lost.
David Crooke
1
0
David Crooke Entrepreneur
Serial entrepreneur and CTO
I'd be wary of giving equity to non-employees, makes things messy for a VC. I have turned down consulting and contract firms because they wanted a piece of the pie.
Steve Simitzis
1
1
Steve Simitzis Advisor
Founder and CEO at Treat
If he's really that essential to the company, then bring him as an employee or cofounder. If he's not willing to commit full time but won't move forward without equity, then find someone else or learn how to do what he does.
Ming Tsui
0
0
Ming Tsui Entrepreneur
HabitatForAll.org
One cannot depend on one person forever. So, either find someone else or have him join in
as cofounder. If he does not want to join then maybe find someone else. Maybe he doesn't want
to own a start up. Maybe he is rich and have all the money already. Maybe he is getting too old.

Many reasons why he might resist. I think you need to be more confident of yourself to
be able to take his role yourself. Looks like the best way is to find a cofounder who has
the same expertise but it is very tough to find cofounders since every cofounder is having their'
own projects. There must be a better way to tied up and connect cofounders and maybe
even combined forces of two projects and meld them into one better project.

Just a thought for how the future of different people working on different projects might be
able to combined and join forces into a much better project that might have better success'
in the marketplace. But as always people just don't want to join forces thinking my ideas are better
than yours. Many people just don't like to share and share wealth. Why, I guess that is human nature
as we are indeed animals in on earth but able to talk and write things down. That makes us supreme
over most animals except probably deadly viruses.
Michael Masello
1
0
Michael Masello Entrepreneur
Digital Marketing Professional
I was in a similar position (the consultant side), asked to work 30-40% below market value. I was offered stock options as an employee to make up the difference. I decided it wasn't worth the risk given all the scenarios that could play out having never made up the difference.

As some here have said if the person is that vital to the venture (and early stage) it sounds like they should be offered founders stock.
Thomas Sutrina
0
1
Thomas Sutrina Entrepreneur
Inventor at Retired Pursue Personal interrests and family
You have chosen to be coin operated, pay for services. From my experience that means you will follow directions, that means you follow directions that you know will lead the company down the wrong path.
You may say that is not me, but after working for corporations for decades I have learned. People that only work for coins do not stand for any principle. You need coins to live. But the company have insufficient coins and are using up someones coins that could be used for them to live. You have chosen.
Linda Marshall-Smith
4
1
Linda Marshall-Smith Entrepreneur
Marketing Consultant, Ambassador, Silicon Beach at CoFoundersLab
I have been on the other side of the table (the consultant's side) as well. Start up founders have asked me to join them for no cash, just equity, when there isn't even a company yet. Perhaps just a product. Anyone who is worth their salt in leading a project forward, whether from a business or technology standpoint, is worth some up front payment. If you are running out of the cash to continue paying this consultant's standard fees, but truly believe they are an invaluable force to getting your start up funded, or marketed, or your MVP built, etc, then yes, it's time to have the conversation with them asking if they would want to join the team officially for a piece of equity and a reduced paycheck. You could bring them on as a cofounder (with founders shares), you could offer them a position on your board of directors or your advisory board for a smaller share, depending on just how much time and energy they are putting into your project. I disagree with some of the others here suggesting you just cut this person loose. People do need to earn money to live, pay the bills, send their kids through college, etc. To put someone down or say they are not as committed as you to your project because they are asking for some compensation is, in my opinion, an uninformed view. So again, if you truly believe this person is crucial to your team, have that conversation and work something out that is mutually amenable. Here is a good article on how much equity an advisor should get based on their contributions level. techcrunch.com/2011/09/22/free-startup-docs-how-much-equity-should-advisors-get
Ming Tsui
0
0
Ming Tsui Entrepreneur
HabitatForAll.org
People just can't understand about business. If you can't pay your consultant
or employees because the business just got started then the venture itself
is a failure from the start.

If that person does not want to join in as cofounder but only wants a fat
pay check then he is basically a scam because he is the one making the
money out of your project.

You see what is going on? He might be able to help you this and that but
at some point he is also taking your business venture down.

Consultants should just advice in some areas you lack and then let them go
and you should start growing from there and should never rely on a consultant
for long time. I think you should think about your project from start and see what
is really wrong.

Good luck. Sad thing to say is maybe step back and stop. Something is definitely
missing. You have to ask if he is not part of this process then what? Will this just fall
apart?

Many questions to ask for sure. Asking these questions will lead to your answers.
Mary Camacho
2
0
Mary Camacho Entrepreneur
Product & Develoment Management | UI/UX
Contribution is contribution at the end of the day. Whether it's from an employee, a consultant or founder. What's important is working out an equitable structure based on the contribution and based on the risk taken. Of course a cofounder that takes no compensation from the company early on deserves a higher stake. But not all founders are full time and not all full time founders should be valued equally. So when it comes down to employees or contractors/consultants with equity, determine what you really need, what really works in terms of cash compensation and then what the long term upside and risk you want that person to share.

There isn't a magic formula. But it does matter about stage. Have you incorporated yet? Are they getting shares upon incorporation for which they can submit an 83b form and avoid tax consequences? Or are you compensating after that in the form of stock (taxable income) or options (not immediately taxable but typically viewed by others as less than equal to stock).

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