Why all the hand-wringing in this thread?
The answer seems pretty obvious to me if you just break it down to financial fundamentals:
1. The consultant's realistic market rate is X
2. You cannot afford X so you want to pay X - Discount
3. Your startup's current honest valuation if you took actual cash from investors would be V
The consultant is effectively investing Discount cash in your startup on
the day they commit to do the work.
Here is the absolute formula for equity compensation that should always be used:
Equity Stake = Discount / (V+Discount)
As long as X is realistic and V is realistic, everything is fair and everyone should be happy.
Example realistic scenarios:
* Company wants a $50k discount on a year worth of work from the consultant.
* Company just raised $200k on a $1M pre-money valuation.
V = 1.2M
Discount = 50k
Equity = 50000/1250000 = 4%
A few caveats:
1. For the consultant's market rate, do not assume a full-time-job-with-benefits salary.
They do not have a full time job with benefits at your company. They are a consultant.
Assume the market rate for consultants of their skill level. However, you should realize
that consultants typically have a discount from the on-demand rate for long-term high
volume engagements and apply that rate if it is indeed a reasonably guaranteed
long-term high-volume engagement.
2. Do not make them double-dip on risk by first paying them less than market rate in cash
and then expecting them to carry highly risky receivables while you scramble about
for cash. If that is going on, they are investing again in your company in the form
of a bridge loan every time you drag out payments. You should either just not do this
or at the very least, compensate them with additional equity equivalent to what a
cash investor would squeeze out of you for a hail-mary-pass bridge loan (which is
fairly usurious in my experience). Really, just do not do this. People have to eat.