Early companies compensate advisors and consultants with equity, which raises
tax, securities and control questions that cash does not.
Tax. Equity issued for services is taxable to the recipient at its value
when received or when it vests, and deductible by the company. An election
within a short window after grant can fix the measurement date at grant, which
for a low-value early company is usually favorable and cannot be made late.
Securities. The issuance requires an exemption. Plans covering compensatory
issuances have their own conditions, including information delivery above
thresholds.
Valuation. A contemporaneous valuation supports the reported value and the
exercise price of any option, and its absence is a diligence finding.
Vesting. Tied to the term of service, with monthly or quarterly vesting and
a cliff, and a defined consequence on termination.
Scope of services. Defined deliverables and time commitment, so that
termination for non-performance is possible.
Intellectual property. Present-tense assignment, because a consultant’s work
is not a work made for hire unless it falls within narrow categories and a
signed agreement so provides.
Confidentiality, and a restriction on advising direct competitors during the
term.
Conflicts. Advisors who serve several companies in a sector should disclose,
in writing.
