Equity for Consultants – Keep it Simple!

I can’t tell you how often a client calls me up and says something like this:

“Matt, we have this great new consultant who is going to make introductions to us to [pick type of business partner]. We will grant him/her X% fully diluted shares up front, and every time he/she makes an introduction, he/she will vest in 100 shares.”

To which I normally say, “don’t bother.”  It’s a perfectly reasonable and rational request, but this is a record keeping disaster waiting to happen. People tend to underestimate how much record keeping is involved with managing employees and consultants, and this just adds an unacceptable extra burden. Imagine when it comes time to sell the company and the buyer says “Tell me how many shares are vested because this will impact how much we pay per share.” Are you really going to have a record of each event that caused shares to vest and the backup to determine if they did, in fact, vest? I can tell you that, among other problems, any uncertainty in the capitalization table when the company is acquired will be resolved squarely and unequivocally in favor of the buyer.

Most standard form consulting agreements produced by law firms in SV are terminable at will, meaning they can be canceled at any time (sometimes with a short notice period). I usually tell my clients to watch how the consultant is performing and terminate them if it’s not going well. The most you lose is 1 or 2 months of vesting on the stock. There are always exceptions to this that make sense — the above is general guidance.

One other tip – always remember to terminate consultants that you are no longer utilizing. At the very least, shoot them an email thanking them for their services and confirming that the agreement is terminated (but make sure you comply with the termination provisions of the consulting agreement). Many consulting agreements are written to be open-ended, and don’t clearly terminate automatically after you stop calling on the consultant. I have been in post-acquisition disputes where a consultant claimed they were still “consulting” and earning shares even though it seemed clear that the company stopped using the services of the consultant. Sometimes the consultant has a reasonable basis to think this, since lean startups are programmed to get things for free and may call on the consultant from time to time for free advice.