Paying Consultant Grunts with Pie
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.
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This may be a UK problem but the structure of a Slicing Pie company in the UK requires all team members to be directors, exposing them to any company debt if the company fails. I’m trying to recruit several people who will likely be small stakeholder (~5%) who are nervous about this. I looked at bringing them in as contractors (same pay rate as if a team member) but the system is so skewed if I bring one employee in as a contractor then everyone will want the same thing. For example, if a contractor leaves after 3 years they keep 2 full years of equity and get paid 100%+ for their time in the last year, regardless of their reasons for leaving. A good leaver employee would get less, a bad leaver far less. Why is it fair for contractor terms to be so much better?
Don’t hire a contractor for three years. Use contractors sparingly because their rates are higher. If you need someone full time get someone to work for a logical fair market salary.
A contractor is someone who does not want to join your team and prefers to be a contractor and charge a higher rate. In exchange for a higher rate, they are subject to a buyout agreement where normal employees are not. Also, at the higher rate, managers need to only use contractors for short-term engagements.
Also, if a contractor quits before completing the work it would be resignation without good reason and they would lose slices.
Also, check out fairsquarellp.com for help with your UK Grunt Fund, they specialize in Slicing Pie deals in the UK….
Thanks Mike! Hi @summershoe, Deborah & Maxine from Fairsquare LLP here. We have a few thoughts on your comment.
First, you don’t have to become a director to work in a UK Slicing Pie startup. You can be an employee or consultant instead. However, when we set up UK Slicing Pie companies, we find that most co-founders and grunts choose to be directors. Because if they’re employees, then the business also has to comply with employment laws, including paying National Living Wage etc. And as Mike says, consultants are massively expensive in terms of pie.
Second, UK company directors who behave responsibly before spending company money are not generally liable for company debts if their company fails. A UK company director is only personally liable if:
– they knew (or reasonably ought to have known, given their role and particular expertise) that there was no reasonable prospect of avoiding winding the company up as insolvent, and
– they did not take steps to minimise loss to creditors.
This is called ‘wrongful trading’, and it ensures that directors can’t, e.g. get away with going on a spending spree when they can see the company is about to go under.
You can protect yourselves against this if you have good financial controls and processes (which we advise on). If you want to know more about being a UK director, feel free to visit our blog and/or contact us: https://www.fairsquarellp.com/startup-team-building/
Thanks Mike! Hi @disqus_ZCQrckEqKz:disqus , Deborah & Maxine from Fairsquare LLP here. We have a few thoughts on your comment.
First, you don’t have to become a director to work in a UK Slicing Pie startup. You can be an employee or consultant instead. However, when we set up UK Slicing Pie companies, we find that most co-founders and grunts choose to be directors. Because if they’re employees, then the business also has to comply with employment laws, including paying National Living Wage etc. And as Mike says, consultants are massively expensive in terms of pie.
Second, UK company directors who behave responsibly before spending company money are not generally liable for company debts if their company fails. A UK company director is only personally liable if:
– they knew (or reasonably ought to have known, given their role and particular expertise) that there was no reasonable prospect of avoiding winding the company up as insolvent, and
– they did not take steps to minimise loss to creditors.
This is called ‘wrongful trading’, and it ensures that directors can’t, e.g. get away with going on a spending spree when they can see the company is about to go under.
You can protect yourselves against this if you have good financial controls and processes (which we advise on). If you want to know more about being a UK director, feel free to visit our blog and/or contact us: https://www.fairsquarellp.com/startup-team-building/