Consulting Structure

Daniel Eberhard CEO, Koho

November 12th, 2013

Hello fellow FD'ers

It is likely I'll be taking on a 2 month consulting gig in the near future. I wanted to reach out to get your insights. I really like the company and have a vested interest in seeing them succeed. Financially, they are broke but they a tonne of liquidity either. 

As a consultant, I want to be part of their solution, working within their framework and resource capacity, while being fair to myself. 

I've done a little consulting before but I was hoping to step up my professionalism in this situation and come in with a refined process. 

Do you have any insights to share regarding; 

compensation structure - currently looks like a cash/equity mix weighted towards equity. 
rate multiplier - I've read standard consultant rates are typically 3x market. Is this true?
structuring/managing expectations or deliverables
transparency/working relationship

As always, you don't know what to don't know see please feel free to share caveats/complications I am likely missing or relevant resources. 

Much appreciated, 

Jake Carlson Software Development Manager at Oracle

November 12th, 2013

3x is way too high. I'd shoot for 2x.

Bill Snapper Owner Principal at SammyCO, LLC

November 12th, 2013

You have to weigh the equity carefully.  Putting on the "school of hard knocks" hat for a moment, most equity isn't worth the paper it's printed on.  You have no way of knowing IF they're going to get funding and if that round of funding ends up wiping out lots of old equity.  It happens often.  That said, if you believe in the company and are willing to place a bet then you have to decide what your investment (i.e. your labor exchanged for equity) is worth.

Cash for services rendered is the way I personally go these days unless I'm an employee or it's equity in my own company.  Sorry if that sounds cold but I have enough equity from prior engagements to paper several homes.

Daniel Eberhard CEO, Koho

November 12th, 2013

damn - *aren't broke but don't have a tonne of liquidity. Sorry. 

James Piechota Founder at Yellow

November 12th, 2013

My rule of thumb is usually 'hourly rate = market yearly salary / 1000'. In other words: 2x market assuming 40 hours a week, 50 weeks a year. The rationale is basically to compensate you for the lack of benefits, and to cover all he unpaid overhead that goes with being a contractor/consultant (managing your own finances, looking for work, sometimes providing your own hardware/software/other tools, etc...).

Luis Avila Owner/Fullstack Architect at IdeaNerd LLC

November 12th, 2013

If you can get away with 2x yearly salary... more power to you. I consulted (developer/architect) for over 10 years. I rarely got away with 2x salary. More typically it  is 1.5x salary. At the very least you'll want 1.3x salary if you're doing a 1099 contract. You'll want to cover your taxes, insurance, 401k, etc. and the 0.3 part should basically cover that.

Joe Zott

November 12th, 2013

In my experience standard consulting hourly rates are about 1/1000th your yearly salary. So if you would be making $100K per year as salary I would expect to pay about $100 per hour. As always all things are negotiated, but I would start near there in establishing your value to an employer as a contractor. If you are paid in stock this payment might be considered as income and you need to pay income tax on it. I generally have not found startups willing to pay you equity equal to what a cash investor would get. So your 1,000 hours at $100 per hour contribution will net you less equity than an investor offering $100k. Unfair, but has been my experience. If your compensation is in stock options then there is a question of how much are the options “really” worth. I have found that belief that the company is going to be very valuable is essential for the consultant to negotiating an acceptable number of options as the company should be considering the options very valuable. So even if you think your options have a true value of $0.10 each your $100K of contributed labor is not going to get you options on a million shares. Probably the most important thing in these kinds of relationships is to ignore the form of compensation and treat it as a job giving it all the professionalism as if this was the highest cash payment contracting job you ever had. Sadly from what I have seen not always the case. As to contractor behavior - In my experience the best contract situations has all work performed based on task agreements, with project plans with schedules, deliveries and resource needs. Weekly reports are submitted by the worker that include specific activities and contributions and identify number of hours worked by day and if appropriate by task. Changes in work are reflected in the task agreement and plan changing so everyone understands what the situation is. As your work will often be dependent on the company or other people if issues arise it is better to bring them up early and be proactive on addressing the impact. Joe

John Wallace President at Apps Incorporated

November 12th, 2013

As far as comp, I charge about 2x my salary (so a $100K annual salary translates into $100/hr consulting rate) where I bill monthly, net-30. I rarely accept equity in lieu of cash. Instead I try to make my payment schedule better accomodate their cash flow. For example, one of my clients had a big seasonal bump in the summer, but they needed the apps done before summer so they could take advantage of that bump. So for them, I split each invoice so the first half was due net-30 and the second halves came due after they got their summer cash. In this case, I knew the company was good for it; I wouldn't do this deal with a new company or one that I thought wouldn't be able to pay me.

As far as setting expectations, I want to make sure I can hit the goals that I tell them with high confidence. That means that I have a healthy allowance for unknowns and non-productive work (meetings/email/design docs/etc) and the some changes in scope. Over time I've found that projects take about 3x my initial (private) estimates. The 3x comes from unknowns/unknowables and the refining of requirements. It's a lot easier to budget that in up front rather negotiating more money with every feature mod or going back later and telling the customer that the project will overrun. (BTW, that 3x number is a number that I found through trial and error for the specific projects I tend to do. For riskier projects, I'd use a large fudge factor. For projects with little risk, that number would be much lower.)

As far as transparency/deliverables, I like the Scrum process (for info, see article on Wikipedia), so brief daily stand ups and retrospective & planning meetings every two weeks. I want to know about changes in direction as soon as possible so I can make sure we can still hit our deadlines.

Good luck with your consulting career!