Should you provide consulting for equity?
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 equity deal.)
We’ve partnered with Roland Frasier who is an expert on consulting for equity deals. He has a free training coming up on this topic — click on the image below to register:
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 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 their 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 the big danger when you do consulting 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 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.
But you have to consider the opportunity cost. When you’re consulting for equity, you could be working with another client who is paying your full fee.
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.
If a pure equity deal is too risky (and it certainly may be), structure it as a hybrid deal; part cash, part equity.
2. Cash Counts: Are They Serious?
Remember the coaching client I was speaking about?
Their deal was part equity, part cash.
My suggestion to the client was to ensure that the cash amount they receive from the buyer is sufficient: that he’d be happy with the cash payment regardless of what happens with the equity stake and shares.
Let’s say your typical fee is $10K per month. Your client is a startup, and they can’t afford that.
So you offer to take $5K per month, and they’ll pay out the other $5K in equity.
This is a viable option: to take less than your full fee in return for shares.
It ensures the client has skin in the game. They are making a tangible financial investment in you and your expertise.
If you go this route, ensure that the cash amount you receive is enough to make you feel good about the engagement. It’s enough to compensate you for your expertise and the value you’re creating for the client
Again, you may or may not be able to convert your shares to cash at some point in the future.
If you can, then great. You’ve won on both fronts.
If you can’t, then at least you’ve been compensated (even if lower than usual) and you come out of the engagement with something rather than nothing.
If a pure equity deal is too risky (and it certainly may be), structure it as a hybrid deal; part cash, part equity.
3. Always Start With An Initial Engagement
Consulting for equity typically doesn’t happen with someone you’ve never worked with before.
A well-functioning consulting for equity deal requires a strong, trusting working relationship with your client.
There must be a culture and values fit.
To establish that trust, consider doing a smaller, paid initial engagement with the client instead of jumping straight into a consulting for equity deal.
For example, you could do a discovery session offer with them.
Let’s say you’re a sales consultant who helps SaaS businesses improve their virtual sales team’s performance.
Instead, of jumping straight into a consulting engagement or taking equity, you a do a 1-day intensive deep dive, where you interview the CEO, sales manager, and sales reps.
As a result of the deep dive, you write a quick 3-page report, outlining
- The challenges the sales team is having selling virtually and what is causing them
- Your strategic plan with the steps the company can take to improve the performance of the sales team
- A clear breakdown of the opportunity and what outcome and value will be created when the recommendations are implemented successfully
Doing an initial engagement gives you a better understanding of the business.
You’ll gauge if you can move the needle and create exceptional value.
If you see the potential then you can have an open and honest conversation with them about…
- The vision for their company
- What they’re looking to do
- The challenges that they’re having
- The outcomes they’d like to achieve
- Your ideas on how you can help them create significantly more value (often by accelerating the results they can see)
At the end of this conversation, both you and the client should be excited about the opportunity that lies ahead.
You should feel good about your conversation and about working together more closely.
If you don’t, don’t even think about doing a consulting for equity deal.
But if there is strong alignment, you’re in a great position to suggest that you could get involved and support the company more closely.
Instead of them trying to figure things out themselves, potentially struggling with implementation, you can help them.
You can accelerate their plans, help them to make greater progress faster, help them to achieve an even bigger vision, and make the pie larger and more successful for everyone.
And that you’d be happy to partner with them to achieve that.
That partnership comes in the form of consulting for equity. Sure, they could pay you a premium fee to be involved. But the other choice is for them to pay you part cash and part equity. Or if you feel very confident about the company, the leader, and what lies ahead, you may consider an equity-only deal after the initial engagement.
4. Change The Conversation (& Consider Alternatives)
Another strategy you can use is to change the direction of the conversation.
There are several alternatives to equity deals.
If a company tells you they are tight for cash and want to offer you shares, use this as an opportunity to really dive deep and ask meaningful questions.
Find out how much money they are currently spending and on what kinds of things. You can often find ways for them to lower their costs or get quick wins, giving them more cash to pay you your full fee.
Some companies burn more cash than they should. Show them how to redirect some of their resources to the work you’ll be doing with them, how they’ll be better off, and why doing so is the right move.
This isn’t a time to hold back and keep your “best stuff.” Deliver value. When you do it becomes apparent to the buyer that having you around is extremely valuable for them.
When you can clearly make your case and demonstrate the value they’ll receive they are more likely to invest with you at a higher level.
Of course, there are several alternatives to equity deals. You can consider…
- Value Pricing: A structure where you and the client get crystal clear on the value you’ll create, and your fee is based on that value.
- Retainer: A “pay for access” retainer where they pay you monthly for access to your expertise.
- Performance Deal: A structure where instead of being paid in equity, you are paid in direct relation to the results that you create.
There are many ways to price your services and expertise.
Consulting for equity can be lucrative when structured well. But done wrong, it can cost you not only money, but a lot of your time.
Get Expert Help Structuring Profitable Consulting Deals
The mark of an elite consultant is your ability to negotiate profitable deals with your clients.
Elite consultant knows how to hedge the risk and create win-win scenarios for themselves and their clients.
If you want help with your pricing strategy to make sure you’re not leaving hundreds of thousands and in some cases millions of dollars on the table, we can help.
Inside of the Clarity Coaching program we’ve helped over 850 consultants to build a more strategic, profitable, and scaleable, consulting business.
Inside Clarity Coaching we’ll work hands on with you to develop a strategic plan and then dive deep and work through your ideal client clarity, strategic messaging, consulting offers, use an effective and proven consulting pricing strategy, help you to increase your fees, business model optimization, and help you to setup your marketing engine and lead generation system to consistently attract ideal clients.
You’ll learn how to make more money with every project you take on — and how to land more clients than ever before. Learn more about Clarity Coaching and get in touch to talk about your situation and goals.