A few years ago, I was in New Orleans sitting by the pool.
I received an urgent email from a Clarity Coaching client:
“I have an early-stage prospective client and they really want to work with me. Before any pricing, he said that they might pay part in cash, part in equity. Good? Bad? What else could I offer?”
I’ve received this same question over the years from many consultants.
Is this a good pricing strategy for consultants?
The answer is: it depends.
How do you put the odds in your favor that it will?
In this article, I’ve listed 4 important factors for you to think about before you do a consulting for equity deal.
The reality is very few companies that issue shares end up going public.
It will help you think more strategically about your pricing and fees.
But first, a quick story…
(NOTE: This is not legal advice. Consult with your lawyer before doing a consulting for an equity deal.)
A Story (Warning) About Consulting For Equity…
Back in my early days as a consultant, I was consulting for a company that was in the biofuel space.
They had received an outside investment, and it looked like there was a tremendous upside.
Well, I didn’t know what I didn’t know.
They were paying me a small monthly retainer but I knew the value I was delivering justified a higher fee.
As the project progressed, they asked me to get more involved. I welcome the idea but wasn’t comfortable doing this at the same monthly fee level — which I told them.
The client gave me a counteroffer.
“We’ll give you several hundred thousand shares in the business.”
And I thought to myself…
“Wow — if these shares just get to $1 or $2, this deal will be extremely lucrative for me if the company goes public.”
And they planned to go public.
So I started to get excited about the upside and accepted the deal.
Fast forward several months, and the company struggled to develop its technology. They needed more funding which was hard to secure. Eventually, the prospects of them going public disappeared. The piece of paper with all of my shares was worth zero.
This is a big danger when you do consult for equity deals.
Consultants go into situations like this and accept equity instead of payment. And more often than not, the equity doesn’t end up being worth that much.
That’s not to say you should immediately turn down consulting for equity deals.
But if you do a consulting for an equity deal, analyze the deal in terms of these 4 factors:
1. Growth Potential
Let’s make it clear: the only time you should do an equity deal is if you see tremendous upside in the client’s business.
If you can’t create tremendous upside for the client — and you don’t see them benefiting massively from your involvement — then you shouldn’t even consider consulting for equity.
However, if you believe that the company has exceptional growth potential and that your expertise can be a crucial part of that growth, then the deal could make sense.
Caution: the keyword here is could.
With this type of deal, you’re deferring the income you would get from the engagement in the form of equity.
Ultimately, you’re making a bet that the company you’re working with will grow, and your shares will increase in value.
Imagine if you’d received early shares from Apple, Tesla, or Salesforce. Here’s the reality check, 99% of companies don’t become Apple, Tesla, or Salesforce. The reality is very few companies that issue shares end up going public.
So you want to ensure there is a high likelihood that they will go public, or that the company is open to being acquired at some stage. Ultimately it’s about a path to increasing the value of your shares and most importantly, having a way to turn those shares into cash.