Need high-powered consultation but can't afford it? Why not pay for it in equity? That's right-offer ownership in your business to those consultants who can help get your start-up off the ground, take it to the next level or otherwise add value. "Companies provide stock to nonemployees for many of the same reasons that they provide stock to employees," notes Eric Hornsten, audit manager with PricewaterhouseCoopers in San Jose, California. The practice not only conserves cash--inasmuch as consultants and other third parties can be compensated using equity--but it may also align the goals of a consultant with those of your company and often results in a mutual respect and trust between you and your consultants. "It motivates consultants to achieve optimum performance," Hornsten adds.
In most cases where equity is issued to consultants, they also receive cash compensation. How much of each? Consider the size and length of the relationship, the opportunity for the consultant to add value, and each party's comfort level with risk and reward. After the consultant and client agree on the duration and dollar value of their relationship, the dollar value is converted into equity. With publicly traded companies, using stock is straightforward: Simply pay out the required number of shares at the current price. Private companies would use the stock value implied by their most recent round of financing or other appropriate valuation assessment. Before taking any action, consult your attorney and accountant.
For further information, contact the nonprofit Foundation for Enterprise Development (858-459-4662 or www.fed.org), which assists businesses in setting up equitybased compensation and broadbased participation programs.
Paul DeCeglie (MrWritePDC@aol.com) is a former staff reporter for Journal of Commerce and American Banker.