Consulting for Equity: What Founders Need to Know

TL;DR: Consulting for equity is a trade: an advisor takes an ownership stake instead of an hourly fee and gets paid when the business is worth more. It works best for profitable founders who want a long partnership, not a one off consult. Before you give equity for advice, check that the value is a multiple of what you give up, use phantom equity or a profits interest with a hurdle instead of straight shares, and build vesting and off ramps into the agreement before you sign.

What consulting for equity actually is

Consulting for equity is a simple trade. Instead of having somebody come in and consult with you while you pay them by the hour, you say: we want to give you a piece of the business you can help us with, and when the business is worth more because of what you did, that is when you get paid. I call it CFE, and it is the main thing I do every day.

Here's why. When I was practicing law, I traded dollars for hours like most professionals do. You sell your time, you get paid your fee, and then you go back to zero. How many times have you done that? You did the work once, your return on that effort was one times, and there is nothing to take from it other than the dollars you got for doing it.

What changed it for me was realizing that the value of an advisor is not measured in hours. It is measured in the value they add. So to me, it should be paid in equity, not in dollars. That is really a fairness thing. You sell your value one time, you get paid for the life of the business, and then you get paid again when the business sells. We are going from labor to leverage, and the founder only pays when the value actually shows up.

How the trade works

The way I work with founders is a deep partnership over one to five years. I'm not coming in for a one off meeting. I'm coming in to work alongside you on the team, the systems and the acquisitions that are going to make your company worth more, and I take my upside in ownership, not in fees. That puts my money on exactly the same side of the table as the founder's. You can see how that works with me on the Consulting for Equity page.

What I've found is that there are four types of help an advisor gives, and it makes sense to give different amounts of equity for each.

1. Advisory. The lowest effort. This is the Shark Tank model: you show up for a few meetings a year and give your opinion.
2. Operational. Helping things run more smoothly. It is real work, but it is rarely the biggest value.
3. Transactional. Helping a company buy another company or sell itself. A transaction can be very valuable.
4. Performance. Going in and actually helping the company double or triple its profits. That is the highest effort and the highest value.

In my own deals a few years back, I had a 3% advisory interest in a $20 million online music instruction company. We would meet maybe six times a year for about an hour. I also held 10% of a $96 million business services company where I was doing performance work, helping it double and then triple its profits and value. A smaller piece of a much bigger pie, and a lot more work. That is how you should think about it. The equity should match the effort and the impact.

Who it fits and who it doesn't

Consulting for equity is for a founder who already has something going. The partnerships I take on are typically a profitable business, three years in or more, with $500,000 or more a year in profit. The owner wants an exit on their own terms, not another decade of grind, and they are open to growing through acquisitions, not just working harder.

It does not fit everybody, and I'll tell you that up front. If your business is under $500,000 a year in profit, start with the free tools and the newsletter. If you are looking for an hourly consultant, hire an hourly consultant. This is not that, and it is not a one off consult either. These are multi year engagements with a small number of founders, because the advisor is betting on the outcome right alongside you.

Start with the value, not the percentage

Before you give anybody equity for advice, run the math on the value they are going to bring. Whether a founder says it out loud or not, the question is always the same: is what I get from this person going to be a multiple of what it costs me? That is what it always comes down to.

So use your own numbers. Let's say an advisor can bring $200,000 of value to the business and they are asking for something worth $20,000. That is easy math. It is ten times what you are giving up. When Ryan Deiss and I go into a company, we only want to go in where it would be hard for us not to deliver five, if not ten times the return. If you can't see a path to that kind of multiple, the percentage doesn't matter, because the trade isn't worth it.

The agreement starts with the right kind of equity

Here's where a lot of founders go wrong. They say, let's just hand over straight equity: shares of stock or a membership interest in the company, on day one. The problem is that in most countries the person who receives it pays tax on the value the day they receive it, and they don't get any cash to pay that tax with. You have also put somebody else on your cap table, somebody with voting rights.

There are better tools. An option gives somebody the right to acquire that equity later. Phantom equity is a contractual right to a return based on the profits of the company and the proceeds when it sells, without actually issuing stock. A profits interest does the same thing in an LLC. Phantom equity and a profits only interest are our preferred way to do these deals, because they keep things clean. There are no voting rights, you don't have to create a new class of equity, and it typically doesn't interfere with the benefits and plans you already have in place.

The key is the hurdle. You agree on a fair value for the company today, and the advisor only participates in the value above that line. Let me walk through the math. Say we agree the company is worth $10 million today, and the advisor gets 10%. Later, it sells for $20 million. Subtract the $10 million hurdle, and that leaves a $10 million increase. Ten percent of that $10 million is $1 million. So the advisor gets a million dollars, and every dollar of it came out of value that did not exist when they showed up. That's the deal you want.

Build the off ramps before you need them

Working with someone new is like dating. Everything looks great while you're dating. Then you take a trip together or you move in together, and you really see how people are in different situations. So give yourself time to see how this person fits your company and its culture, and build the off ramps into the agreement before you sign it.

Vesting is how you do that. Equity can vest immediately, over time, when a specific service is performed, when performance hits a target like EBITDA doubling, or when an event happens, like a sale or a funding round. If you use performance vesting, tie it to KPIs you both agree on, and make them leading indicators, not lagging ones, so you know sooner whether things are working the way they should.

And look, I've seen what happens when you don't do this. I was in a deal recently where an executive came in and didn't perform to the owners' expectations. Because of how the agreement was written, it kept paying at a high rate, and there was no process for asking whether it was working. Untangling that has dragged on for months.

What the advisor will ask for

A serious advisor is going to ask for some protections too, and you should understand them before the conversation starts. The big one is accelerated vesting on a change of control: if the company sells, their unvested equity vests immediately, because the new owners may or may not honor the deal. They may ask for ride along rights so they can sell when you sell. They may ask for a put, which lets them require the company to buy them out.

None of that is unfair. It is the same alignment of interests you want, just written down. Cash is a certainty. Equity is not. The person taking equity is carrying real risk with you.

The bottom line

Consulting for equity works when both of you are betting on the same thing. The founder gets an advisor who only wins if the business is worth more. The advisor gets paid for the value they create instead of the hours they bill. Get clear on the value first, pick a structure with a hurdle, build in the off ramps, and you have a partnership that is actually fair to both sides. A lot of that value comes from building a team and systems so the business runs without you.

I went much deeper on how one of these engagements actually runs on Business Lunch, where Ryan Deiss and I walked through a consult we had just finished, step by step: How Equity Consulting Can 10X Business ROIs.

If you run a profitable company and want a partner who is paid in ownership, not fees, request an introduction. I review every application myself.