Consulting Agreement With Equity

At one time or another, most startups work with a consultant or enter into a contract with a strategic partner and face a dilemma: Does the company need to offer equity to the consultant or strategic partner to pay for services? For a startup with low starting capital, issuing shares or a warrant instead of paying cash is a simple way to get limited cash reserves while growing the business. For a growing and successful startup, consultants and strategic partners may ask to receive equity rather than cash because they want to participate in the company`s upside potential. While equity can be a useful tool in these situations, be careful about when and how you use it: one of the misunderstandings about capital arrangements is that there are no costs when you take equity. This is not true, because if someone receives shares of a company, they have to declare their value and pay taxes on it. If a company is at an early stage, the value should be nominal. However, as soon as the business starts generating revenue, the value could be more than expected. The founding institute recommends granting consulting grants depending on the phase of the business and the type of consultant. The following matrix offers a good rule of thumb for determining equity after the phase of your startup lifecycle: When it comes to the amount of the equity grant and the exercise of the advisor`s grant, it really depends on how you see the relationship and the time and effort the person brings. As for market percentages, Brad Feld recommends in his book Startup Boards to external consultants a grant of 0.25 to 1 percent from the company, which is unwavering for two to four years. See also Mr. Feld`s contribution that 1% is rich for an advisor. True, there are super-advisors who could justify a higher subsidy, but this is the exception to the rule.

3. Is your advisor or partner an accredited investor? The rules applicable to the issuance of equity capital to an individual in relation to a company (e.g. B an LLC or a company) are subject to different rules. .

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