Invested Interest

Need high-powered consultation but can't afford it? Why notpay for it in equity? That's right-offer ownership in yourbusiness to those consultants who can help get your start-up offthe ground, take it to the next level or otherwise add value."Companies provide stock to nonemployees for many of the samereasons that they provide stock to employees," notes EricHornsten, audit manager with PricewaterhouseCoopers in San Jose,California. The practice not only conserves cash--inasmuch asconsultants and other third parties can be compensated usingequity--but it may also align the goals of a consultant with thoseof your company and often results in a mutual respect and trustbetween you and your consultants. "It motivates consultants toachieve optimum performance," Hornsten adds.

In most cases where equity is issued to consultants, they alsoreceive cash compensation. How much of each? Consider the size andlength of the relationship, the opportunity for the consultant toadd value, and each party's comfort level with risk and reward.After the consultant and client agree on the duration and dollarvalue of their relationship, the dollar value is converted intoequity. With publicly traded companies, using stock isstraightforward: Simply pay out the required number of shares atthe current price. Private companies would use the stock valueimplied by their most recent round of financing or otherappropriate valuation assessment. Before taking any action, consultyour attorney and accountant.