That would work, though the devil is in the details. The contractor would need to structure this as a loan with an interest level proportional to risk (i.e. high).
Or, if he wants some of the upside, structure it as a convertible loan. That actually may be a better idea for both parties, rather than a straight up shares for work trade.
Then presumably the founders ought to do do the same... ie. charge 3-4x their opportunity cost as "investment" into the company. Then that brings the contractor's proportion back down (to say, 10% assuming he's working quater-time and there are two other full-time founders). And then of course, his role should be substantially discounted based on commitment to the company.
Plus, using 3-4x rates would be awful when talking to investors. The opportunity/contractor inflated rates would quickly dilute any investments over time.
EDIT: I'm agreeing with tptacek. Trying to compensate a part-time contractor to get founder-level equity (eg. 10%) in proportion to "time put in" would be bloody insane!
Trying to compensate a part-time contractor to get founder-level equity (eg. 10%) in proportion to "time put in" would be bloody insane!
I'm arguing the contractor should be compensated fairly. We're going through this entire exercise because the founders don't want to pay the contractor a market wage. So the service that is rendered should either be structured as a loan (convertible or otherwise), or the contractor is compensated with shares proportional to the amount of work under a fair valuation of the company. Don't like those options? Pay the man for the work he did. What's the alternative? Work for free?
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Oh I'm sure the startup would prefer deferred compensation, but it makes no sense for the contractor. He'd be taking all the risk.
No startup should prefer deferred compensation. It can be a nightmare, particularly in the context of a non-employee relationship. Just a taste of the possible implications: http://www.pillsburylaw.com/siteFiles/Publications/F26CF354F...
That's why you don't price deferred comp at 1x your rate.
That would work, though the devil is in the details. The contractor would need to structure this as a loan with an interest level proportional to risk (i.e. high).
Or, if he wants some of the upside, structure it as a convertible loan. That actually may be a better idea for both parties, rather than a straight up shares for work trade.
Yeah, or, just 3x or 4x your rate. No need to think about "interest rates".
Then presumably the founders ought to do do the same... ie. charge 3-4x their opportunity cost as "investment" into the company. Then that brings the contractor's proportion back down (to say, 10% assuming he's working quater-time and there are two other full-time founders). And then of course, his role should be substantially discounted based on commitment to the company.
Plus, using 3-4x rates would be awful when talking to investors. The opportunity/contractor inflated rates would quickly dilute any investments over time.
EDIT: I'm agreeing with tptacek. Trying to compensate a part-time contractor to get founder-level equity (eg. 10%) in proportion to "time put in" would be bloody insane!
I'm arguing the contractor should be compensated fairly. We're going through this entire exercise because the founders don't want to pay the contractor a market wage. So the service that is rendered should either be structured as a loan (convertible or otherwise), or the contractor is compensated with shares proportional to the amount of work under a fair valuation of the company. Don't like those options? Pay the man for the work he did. What's the alternative? Work for free?