Can I pay consultants and strategic partners with equity?
Takeaway: Yes, you can and should pay consultants and strategic partners with equity, but these grants must be made in compliance with Rule 701, be subject to vesting, and be structured to reward specific, valuable services rather than capital formation.
In the early stages of your startup, your two most precious resources are cash and time. High-level strategic advisors, key technical consultants, and early corporate partners can provide immense value, but their cash retainer fees are often beyond the budget of a seed-stage company. A powerful way to bridge this gap is to compensate them with a form of currency you do have: equity.
Granting equity to consultants and advisors is a standard and highly effective strategy. It allows you to access world-class expertise without draining your bank account, and it creates a powerful alignment of incentives. When your key advisor owns a piece of the company, they are no longer just a vendor; they are a long-term partner in your success.
The Legal Framework: Rule 701 for Consultants
Just like with employees, granting equity to a consultant is an offering of a security. You must have a valid exemption from SEC registration. Rule 701 provides this exemption, but with a critical condition: it can only be used for consultants and advisors who are natural persons (i.e., individuals, not a corporation) and who are providing bona fide services to the company.
The "Bona Fide Services" Test: The services provided must not be in connection with a capital-raising transaction. You cannot use Rule 701 to pay a "finder" or a broker whose primary service is to introduce you to investors. That is a separate, more complex area of securities law.
Structuring the Grant
Use NSOs, Not ISOs: Remember that Incentive Stock Options (ISOs) can only be granted to employees. Any equity grant to a non-employee consultant or advisor must be a Non-qualified Stock Option (NSO) or a Restricted Stock Award (RSA).
Vesting is Essential: Advisor grants must always be subject to a vesting schedule. This ensures they are incentivized to provide value over a sustained period. A common vesting schedule for an advisor is two years, often with monthly or quarterly vesting and no cliff. The vesting can also be tied to the achievement of specific, measurable milestones.
Define the Deliverables: The advisory agreement should be a formal contract that clearly outlines the specific services the advisor is expected to perform in exchange for their equity grant. This is critical for creating an accountable relationship.
How Much Equity?
Advisor grants are typically much smaller than those for full-time executives. A standard grant for a high-value strategic advisor often falls in the range of 0.1% to 0.5% of the company's fully-diluted capitalization, vesting over two to four years. For scientific advisory boards, the grants are tailored to the level of expected contribution and prestige of the advisor.
By using formal agreements and vesting schedules, equity can be a powerful currency to build a strong, aligned network of expert advisors who have a real, tangible stake in your long-term success.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.