Shaping my vision on how should high-profile non-founding team members be compensated.
For the lack of better word, down the text I refer to them as consultants.
- Cash should be the primary form of compensation.
It is always bad for both the company and the consultant to leave a piece of equity hanging.
- An option to trade cash back into equity must be offered.
This option should be limited by time and broken down by current market value of the company today and its projected market value in the future.
- Consultant’s rate should go down thanks to the above offer.
Both the company and the consultant agree they are looking for long-term partnership.
The trade-to-equity offer thus offers a big upside. In order to be eligible for this upside, the consultant should be willing to go below their market cash rate.
- Say, my company is now valued at $10M.
- We believe you could invest 50 hours and significantly improve my marketing.
- Your hourly rate is $400. Therefore, you would expect to be paid $20K.
- My offer is:
1) $250 hourly in cash, for the total of $12500.
2) A 12-months option to trade in $2500 for 0.25% in equity (at $1M).
3) A 6-months option to trade in $5000 for another 0.25% (at $2M).
3) A 3-months option to trade in $5000 for another 0.1% (at $5M).
- Consultants are paid well and are paid cash.
Cash deal is a win-win.
Getting support from the board on this is my job.
Yours is delivering the results you have committed to.
- Consultants are not forced to be invested into the company.
While their trust in the company is being evaluated as well.
- It establishes the foundation for long-term partnership.
Which, should it emerge, will continue on the same cash/equity terms.
- It allows finding partners on win-win terms.
The offer scales up.
If your team is awesome, I would be glad to pay you $100K or $250K for a quarter worth of work, on the same terms.
You would not have to be committed and can take cash if you prefer. Should you decide to leave cash on the table and join me as a co-founder or founding partner, you would be doing so with a healthy stake in the ball park of 5% .. 10%.
Which would happen after you deliver consistent, valuable result throughout the period of several months. And after in the company and in each other we trust.
After discussing the idea with a few friends.
- The above assumes the company has already raised money.
If it has not, then it is not looking for someone willing to work for fun and equity. They do not qualify as consultants. They are co-founders.
My philosophy is simple: Convincing those, who are of employee mentality, to take equity instead, never works. Instead, play a fair game and convince investors to give you cash for it.
Cash from investors opens doors for better long-term deals.
- Treating consultants as investors only makes things more complex.
While the proposal above may be implemented by means of convertible notes or other investment instruments, I would refrain from taking that route.
First, convertible note is an investment. Making investments requires extra paperwork, at least in the US, to prove that the consultant is wealthy enough to act as an investor.
More importantly, here we are talking about an early-stage private company. Introducing more types of instruments essentially brings the company to more “public” state, which is what private companies generally try to avoid.
If the agreement can be reached by writing a few technically independent stock options, with different vesting and exercise periods, strike price and number of shares, I would suggest going that way.
Private companies are not built to offer complex cash-equity financial instruments. They are built to get the job done!