In Slicing Pie I recommend providing a sliding scale buyout to freelancers and consultants who provide services to the company. In this scenario the consultant can earn up to 200% of their base rate in pie if you are unable to pay them. The risk premium goes up a little each month so the earlier you are able to pay the less you will pay. So, if you pay your bill on time you will pay the 100% of their fee, if you pay them in six months you will owe them 145% of their fee, if you pay them in a year you owe them 200% of their fee and after that they are entitled to a slice of the pie (less what you paid). The nice part about this system is it enables you to buyout consultants and keep the pie intact. If an investor comes in they can choose to pay the consultant off and avoid granting real equity to someone who isn’t part of the team.
You could always hire someone as a consultant and just not pay them until you have the money and wind up paying less. But that wouldn’t really be fair because you are not compensating them for the risk they are taking by betting on you.
It’s important to note, however, that just because you are putting off payment or paying in pie you shouldn’t ignore the rate that the consultant is charging. Negotiate rates with the consultant knowing that you may be paying 100% premium or giving them actual equity. A consultant who feels like you have a good chance of survival and believes in the concept should be willing to offer you “start-up rates” that are less than regular rates. It is perfectly fair to negotiate a rate that both of you are comfortable with. Consultant rates are often higher than an employee’s Grunt Hourly Resource Rate (GHRR).
With this in mind, you probably won’t want to hire a $600 consultant to write your marketing plan. Even at a discounted rate you will be paying a lot for something that may not yield the results you want (better to pay based on results, but I’ll save that for later). Most consultants who understand start-ups understand that paying full price isn’t a good option.
The key here is to leverage the pie to acquire the skills you need, but provide a means to keep the pie intact to make it more attractive to investors. As always, being fair and doing the right thing should be your guide.