Startups · Consulting

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

Christine Danning

October 15th, 2016

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?

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

October 15th, 2016

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.

Arthur Lipper Chairman of British Far East Holdings Ltd.

October 16th, 2016

Perhaps some wealthy individual will establish a fund to pay for the services of those offering for fee advice to very early stage companies. The companies could grant a royalty to the fund. Indeed, this could be a good investment for the fund, especially if there was an analysis of probabilities of the business succeeding by the fund. The Funding of Advisors Fund (FOAF) could then also do an evaluation of the advisors and the results of their advice to their client companies. So the proposition could be grant us a royalty of defined terms and we will pay for the paid service of an advisor on which we agree. Could be a great way of developing a portfolio of royalties in promising early stage companies.

Martin Omansky Independent Venture Capital & Private Equity Professional

October 18th, 2016

Arthur: Your suspicions are not well-founded by our experience - although this is a big complex world and there are many possibilities for bad behavior. The fact is that some entrepreneurs and some consultants prefer equity as part of, or all of their compensation. I think that the best policy for a consultant is to take on the occasional pro bono or equity-as-compensation project, but on a very selective basis. Once in a while, the equity becomes valuable. Such instances, however, should not be the principal source of a consultant's income - unless of course the consultant is already flush with money and is consulting just to do something interesting. Entrepreneurs trading equity for services often don't have a choice. Your emphasis on royalties is valid in some cases, but there are many more cases where royalty payments from third parties are not part of the picture. One could argue that profit sharing would be an alternate choice in lieu of royalties. Given the narrow range of choices, I would select the work-for-hire method. If an entrepreneur cannot afford to pay for needed expertise, he/she should reconsider the wisdom of going into business in the first place. Sent from my iPhone

Sebastien Mirolo CEO DjaoDjin inc.

October 15th, 2016

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.

Denise Corcoran CEO, Leadership & Organizational Game-Changer | CEO Advisor | Consultant | Coach | Growing Leaders that Grow Companies

October 18th, 2016

I have been following this discussion with great interest.  I am one of those consultants that has actually seeked part of my compensation in form of equity, although not with early stage companies.  

My specialty/niche is growth stage companies and I have selectively asked for equity with the right companies that I believe in, I know I can have impact in the successful growth of their company and I see a bright future.  

I just recently got turned down by one of my client companies (about to go public in 2018) and was turned down.  I was told that their agreement with VC backers did not allow equity distribution to non-employees.  

However, because they could not pay me my full fee, I got creative with the exchange as I knew the COO personally.  While some equity for my full fee would have been my preference, we made an agreement that he would personally introduce/endorse me to 3 CEOs in other companies.  I probably could have asked for more.  It was really an experiment.

For me personal introductions to CEOs is worth its weight in gold.  So there are other forms of exchanges that are win/win.  Just need to think outside the box.


Martin Omansky Independent Venture Capital & Private Equity Professional

October 16th, 2016

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

Arthur Lipper Chairman of British Far East Holdings Ltd.

October 18th, 2016

I am suspicious of the conviction or sincerity of entrepreneurs willing to use equity as currency when there are alternatives.

Chuck Bartok Social Media Consultant, Publisher, and Contrarian Curmudgeon

October 16th, 2016

I have come across a few new companies that wanted consulting and were a bit short of money allocated to that service. Over the years I have been rewarded VERY well with my forever very small % of Gross profit, no equity.
But the growing income has been appreciated.

Christine Danning

October 16th, 2016

Love the input...
Was interested in what others thought about that scenario instead of only thinking that the way to get the right people on board is to divvy up their equity.

I've been consulting with businesses, inventors (IP design through marketing, etc), product development, business development for over 20 years and have my own patents. My contracts are written up with an hourly rate for an expected number of hours within phases that are agreed upon with the client. There is always a learning curve attached to any business for the consultant, the sales person, anyone who is stepping into an industry that may be new to them. Many times, I quote a minimum fee for that learning curve for me to spend my time researching the industry and what/where the client wants to go within that industry. I've been very explicit in my contracts so when I hand over the report or spend my time working with the client on deliverables, we know we are on the same page and working towards the goal. Sometimes, it may be that they have paid me $3500.00 to review the design of a new product/service with their ideas of where that product or service will, in their mind, fit into the marketplace. I always try to stretch their thinking...if it will fit in here, what if you did this so it could fit into this market also...
After so many years in sales, business development, consulting, I'm still amazed at how many new business owners are very short-sighted and their tunnel vision will ultimately be their ticket to the business bone yard.
I love nothing more than a challenge on a new invention, a new business, etc, but my time is limited so I try to offer a more feasible solution for their potential success in the way of reasonable consulting fees and not taking an equity share. I don't want to own their business, I don't want to manage their business, but I do have the experience to help them find paths to success IF that idea or business has the right model (idea, team, capital, etc) to become successful.

Arthur Lipper Chairman of British Far East Holdings Ltd.

October 16th, 2016

If you realy, realy believe in the company then use other means of compensation, including a percentage of revenues (a royalty) rather than stock ownership. The more others have the less you will have.