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Ask HN: Deferred Compensation for Startup Consultant?

3 points by waldrews ↗ HN
Hi, I imagine it's a common situation for specialist consultants working with startups, who can't quite afford to pay them in cash, to work out alternative payment arrangements.

Being paid in stock is one option, but how common is it to be compensated by debt (which presumably would be paid only if the startup survives long enough)? Maybe in the form of a non-recourse note, maybe in the form of payment due after an extended period (year+), or perhaps convertible debt?

Anyone have experience with such arrangements, cautionary tales, tax implications?

8 comments

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smt88
Startup debt and equity is, in practice, worth $0. If they can't pay anything in cash and badly need a consultant, they're definitely going to fail. That means that they don't have enough cash to operate (which is already a good sign they're going to fail) and they don't have the expertise to even build a company in the first place. Don't waste your time.
waldrews
I hear you in the general case. The specific situation here is the startup will be much more fundable once the piece the consultant can build is done, but the consultant would rather be paid in e.g. a year than hold on to equity. So, it's more of a 'I'll get you over the hump, then pay me, and I'll go away' situation. Is that unreasonable?
nickstinemates
It sounds like you're on the side of needing a consultant in this case vs. being the consultant. In which case, it's up for both of you to decide.

If the person is insistent on cash at some point, put together a services agreement and include a clause in payment terms that define whatever your agree to. That way, the debt/liability is understood and carried as a part of any normal order of business.

waldrews
Heh... I tried to write that in a 'viewpoint neutral' way, but I'd be the consultant, I'd be making them a predictive modeling piece which would help them get to MVP and get funded. So I guess I'm trying to figure out the right way to make that deal; something with more risk for my side than asking for cash, but less risk than taking an equity piece.
smt88
> I'd be making them a predictive modeling piece which would help them get to MVP and get funded

In this funding environment (and even in a much better one), they're not going to get funding just because they have a working product. They'll need to show months (likely multiple quarters) of rapid revenue growth.

And if you're able to just build them a fundable product right away, what do they bring to the table? They can't build their own product, they don't have money...

I've also never heard of anyone get funding for predictive modeling because the modeling never works that well and is easy to replicate.

JimtheCoder
"The specific situation here is the startup will be much more fundable once the piece the consultant can build is done..."

I don't like the sound of this sentence...

smt88
> the consultant would rather be paid in e.g. a year than hold on to equity

Debt and equity are effectively the same thing with different pricing. Either way, you'd be investing in a completely unproven venture with no customers and no investors.

Even for seasoned professionals, investing in a company like that is considered setting money on fire. So I'll just reiterate that you should do this project if you want to, but consider the compensation to be $0 because (short of a miracle) that's what it is.

willcate
If my experience is anything to go on, you will never see any money.