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Would you rather pay a consultant on a contract instead of giving an equity stake?

If you are concerned about giving up any of your equity, why not look at hiring a consultant who has the background you need at that specific time, (marketing, development, IP, business start-up, etc) to come on-board for a designated length of time (say 4 months or 6 months) to help you move your product, service or business forward. This seems like it would be a no-brainer to me but I don't see many doing this? Why is that?

38 Replies

Irwin Stein
4
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Irwin Stein Advisor
Very experienced (40 years) corporate,securities and real estate attorney.
The reason is that a lot of start-ups do not have or do not want to spend the money. You are correct, it is better to hire the best person you can get rather than the best person that you can get for equity.
Sebastien Mirolo
2
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Sebastien Mirolo Entrepreneur
Subscription Product Engineering
Imagine you are building a house. You need someone to paint the walls but since you have no cash to pay them two days work, you strike a deal where they own the kitchen and paint the walls for "free". Now you want to sell the house but every buyer needs to be made aware of that pesky claim on the kitchen...

Drive for Uber and pay that person you need with the cash you make. Charm them by mowing the lawn at their local church for the time they help you move the business forward. Be creative. Keep equity for the people that have tied their fortune and career,for better or worse,to your success.
Christine Danning
0
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Christine Danning Entrepreneur • Advisor
Corporate Solution Specialist & Troubleshooter
So what if you have $3000.00 that you can invest in a good consultant for 30 days of 8 hrs, 5 days a week or $3000.00 for 60 days at 10 hrs a week, 3 days a week. Would the longer stint be more productive than the short 30 days to be able to have a better staging for success over the 60 days instead of the 30?

Irwin Stein
1
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Irwin Stein Advisor
Very experienced (40 years) corporate,securities and real estate attorney.
You hire what you need. I give advice to start-ups and they usually want less hours over a longer time but there is no right answer.
Zubair Ansari
0
0
Zubair Ansari Entrepreneur
Founder and CTO, CionSystems Inc.
In my experience it depends on the economic situation and need. Startup needs 'sales', this is typically foremost in everyone mind. The other aspects like business development, marketing though are needed as a support but at the end of the day it is sales. Secondly, cash is very limited pot of gold and they have to use it judiciously.Now consultant is unknowncommodity because you have no idea whether they will deliver or not and to what extent. Also, as a startup, if some consultant wants cash (non vc backed startup are hard pressed for cash) then I question should I spend cash and take a chance with consultant when I have no way to know if consultant believe in the product and they will deliver? (Invariably several consultants may not deliver to your expectation. By asking for cash consultant in a way communicating that they are unwilling to take risk, and don't believe in it and they just want to be paid. Consultant becomes attractive if they say they will deliver ABC and then only get paid, better yet paid higher commission upon delivery.

Sebastien Mirolo
0
0
Sebastien Mirolo Entrepreneur
Subscription Product Engineering
Hi @Zubair, taking equity from a business means investing in the business. It is well documented that Angel investors sometimes end-up with close to nothing after a few rounds. Minority investors might even loose money, even if the business is ultimately successful. Imagine the poor consultant with her few shares... I don't blame her for asking for cash.

Never pay consultant per hour, pay for deliverables, pay upon delivery: I totally agree.
Zubair Ansari
1
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Zubair Ansari Entrepreneur
Founder and CTO, CionSystems Inc.
Hi @Sebastien,
I personally don't want to pay in equity because it can create other type of problems later on unless all parties are 100% committed to the idea. It depends on the role the consultant will play, if they are sales then I want to pay on commission though higher so the risk is compensated with the higher reward, if the consultant wish then equity. However, I have seen consultant ask for cash, high commission and as well as equity.

For other type of roles, it is a bit tricky because as you said just giving few shares will not be best option for consultant. Perhaps, in this situation where the job doesn't directly generate revenue, a small amount of cash with the agreement that a small % of product sale commission for certain period of time may work or some other combination?

My point is, it is a risk on both sides, and both parties have to show commitment, flexibility, and believe in the product and their abilities.

Jerome Peloquin
0
0
Jerome Peloquin Entrepreneur • Advisor
President, Family Fish Farms Network, Inc.
I think the issue is stock dilution ... a complicated issue but my belief is that stock is cheap since you control the presses ... need more investment .. print more stock. I'm sure others will disagree. Jerome Peloquin President The Family Fish Farms Network, Inc. 717 Lawrence Street, NE Washington, DC, 20017 cell: (410) 227-0498 (Skype) fishfarms1 LinkedIn Profile email: [removed to protect privacy] website: www.thefamilyfishfarmsnetwork.com We grow healthy local food ... save fresh clean water ... create decent paying jobs.
Martin Omansky
1
0
Martin Omansky Entrepreneur
Independent Venture Capital & Private Equity Professional
This is an easy one. Good consultants are expensive and start-ups are cash poor. Often, the only free currency they have is equity. A secondary issue is availability. In Cambridge, MA, for example, every cab driver is a Ph. D./consultant, but one would be hard pressed to find a good consultant in less thickly-settled communities. A tertiary consideration is: how do you know that the consultant is any good and is appropriate for your needs? Sent from my iPhone
Maxine Pierson
1
0
Maxine Pierson Advisor
INTERIM CEO, EXECUTIVE DIRECTOR/ VP Investor
Dear Christine - Great question; I choose to work on RETAINER-as an active speaker - panelist - it could not be any other way - I also consider the Company equity/stock -especially if the Company is publicly traded. And it has a relatively decent balance sheet.But like all transactions- it depends on the needs of the participants. I was once retained for 90 days and ended up spending 2 years and also with a minority company ownership.EVERYTHING is negotiable.....
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