Hello,

I have just been offered a consultancy position with a company that appears to have had great growth in the last few years and having spoken to them about their future plans (of which I am personally involved in shaping) should continue to grow in the future.

In return for my time, they have offered equity in the business rather than cold hard cash in the first instance. This will be paid monthly over an initial fixed term contract, with the option to extend at any point within that period.

This is a new one for me, is this a good/bad idea, what do I need to be thinking about, and are there any questions or terms that I need do discuss with them prior to agreeing?

If it matters, it is a company that I am very excited to work with and it seems to be a good potential career/cv move given the progression that I would like to make in the coming years.

Many thanks in advance for any thoughts and comments.

It removes a lot of the risk from the business. You essentially become free labour. Stay stagnant or recede, and you get paid very little, grow the business and you take a cut.

I was once offered a job on this basis. I wasn’t actively looking, and felt that it was quite a cheeky offer. It’s like saying “we like you, just not enough to pay you unless we make a bit more cash”

having spoken to them about their future plans (of which I am personally involved in shaping) should continue to grow in the future.

Are you as good as you think you are? Would expect to see more deals like this going forward. If you can deliver then you get a share of profits/savings etc. If not you go hungry.

If you are going to be in a position where you can make the business grow and expand then if you think it will go for it. If not you should probably not charge them cash for your input.

Thanks Paul, thanks Mike.

Right now, this work won’t take up too much of my time – maybe a few days a year, so it would be more of a fun hobby rather than a proper ‘job’ as such. But from where I am sat I think that this may grow into something more, given time.

LabMonkey – the other variant I am using is a small retaining rate which will go up as business improves. Keeps me doing 1 day/week for them and doesn’t cost them too much.

Mike: that is something that I had considered and I guess it would be sensible I guess to guarantee a small amount for my time.

Edit. The business is growing anyway, without any input from me to date – so a share option would be good anyway right? But, the plans they/we have should take things up a notch again and so I am very keen to be involved.

One question I do have is how do you determine how many shares is a fair payment for time/expertise?

you have to consider both current value and the incremental increase in value that you create both in terms of your creation of running income but also in terms of goodwill in a business that is growing.

If you are on an equity ratchet you also have to consider whether it is new equity that is being created for you or transfer of equity from existing owners. How many equity owners are there? How much equity do they own? Are they all director shareholders (and fee earners) or are there sleeping capital shareholders too?

There’s obviously not one fixed answer.

Equity over time without hurdles is not great for them. However, equity for delivering business goals (whether income or setting up systems or establishing a new market etc) looks better. How much is your time commitment worth in the open market? Say it’s £50k, then in terms of equity Id want the value of equity granted at least based on forecasts, to represent at least twice (if not 3x) that rate to cover the risks that are outside your control. But what if that ends up being a large chunk of the company equity, say 30%+, is that realistic?

An alternative is working for income share with a small equity grant to reflect your efforts in growing the business on top of delivering income. Say, 30% of gross income that you deliver to the company plus another x% of equity each year.

Only you will have the figures to help you work out what makes sense. And be prepared for it there NOT to be a viable solution – some companies just dont have the turnover and growth to support too many owners.

you have my mail separately LM, if you want to go offline, and BTW Mrs Stoner knows this stuff as well and I reckon she owes you now so cash it in. I’ll get her to pitch in 😉

Equity in a listed company has value. Anything else is just a promise that will probably be worthless. Knew loads of people who got shares in tech companies as part of pay, and no one who ended up with anything valuable. For work now, get paid in money that you can spend now.

tbh If its currently only a few days a year, seems a low risk – as in you’ve not ‘tied’ up much cash if it doesn’t deliver.

I’d talk with your Accountant though to make sure the contract is the most tax ‘efficient’ for you – ie you can write off the loss or get the max net.

Joe: it is a tech company, but I think it is one of the good ones.

b r: no cash involved – shares for time/expertise. I will talk to the accountant – thanks for that suggestion.

If the company is private then Equity is a very flexible term!

Private companies don’t have shares in the normal ‘stock market’ sense of the term, they have classes of shares determined by contracts which change every time an investment round takes place. Employee stock options are normally what are often called ‘ordinaries’ and are bottom of the heap. The investors will have preference shares (there can be many classes) and then there the ratio of value of the various preference classes to ordinaries and others is defined in the contracts with various mechanisms like ratchets and caps which mean that the company can sell / IPO for $100m, but the ordinaries are worthless as they don’t pay out unless the exit if North of $200m. So you might own 5% of the ordinaries, but in effect they are worthless.

My company has something like 6 classes of preference shares as well ordinaries. The ordinaries are utterly worthless, so me now have preference shares as stock options to motivate us. However, a contractor may well be offered ordinaries in lieu of pay as they wouldn’t know what the difference was….

If the company is very young and growing fast, then you could do very well out of share options / equity, but every time it goes back to the investors for more money, all previous equity allocations are diluted (sometimes wiped out)…..