Fractional Resources

This is probably the most common question I get from fellow fractionals, especially those working with early-stage companies. These companies often try to convince you they can’t afford market rates, suggesting equity as either compensation or a bonus.

Here’s my first question when this comes up: Are you building an investment firm? Are you managing an investment portfolio?

If not - then never reduce your price in exchange for equity. Period.

Let me be blunt about why:

• 99% of businesses fail before any liquidity event that would make your equity worth anything
• Even when companies succeed, later investors often use various mechanisms to squeeze out early equity holders - advisors, consultants, contractors, and employees who helped build the business
• Even with public companies, equity can be worthless. I’ve personally seen this: required documentation never materializes, deadlines pass, and suddenly your options expire worthless
• Private company equity? Even worse. I’ve had both compensation equity and in-lieu-of-payment equity evaporate when companies simply stopped responding

Instead of focusing on equity, focus on pricing your services correctly. This means:

• Understanding exactly what fraction of the CTO role you’re taking on
• Having the “Why Conversation” to understand their true needs and the value you’ll provide
• Determining your actual costs (remember: cost is not price!)
• Building in profit - you’re running a business now!

Fractional CTO Kathy Keating offers an interesting perspective on equity calculations. It’s well known that I’m not a fan of hourly engagements, but I do appreciate the formula Kathy uses here - so, if you do decide to tackle equity as part of your pricing, hopefully this can help.

Here’s Kathy’s approach:

I typically take equity for up to 1 hour/month of my time. For everything else I spend above that, I want to be paid. Your situation might differ.

When taking equity I want the equity grant to reflect my input into the company as they would compensate an employee doing the work. Here’s an example:

Let’s say the full-time CTO role would be 30% equity.

I’m not full time and not a founder so the value they get from me is diminished because they can’t say that I’m their co-founder. They will also need equity for a full time CTO around Series A, so I need to leave room for that. So I cut that in 1/4 which is 7.5%

And I’m only going to work 10 hours a month for them, so that is 5.95% of a full time month. So I take 5.95% of 7.5%. That ends up at 0.45% equity.

So I would ask for 0.5% equity and I would want it to fully vest at or before their Series A (or revenue equivalent).

If you want to be paid $ for some of it and not pure equity, then you would need to adjust the equity number down further and add in the cash compensation.

Here’s my fundamental rule: Only take equity if you would, completely independent of the work arrangement, be willing to take your own cash out of the bank and buy their stock. And only after doing ALL the due diligence you’d do as an investor.

If you do have equity and investment experience, and have consulted with appropriate counsel to structure agreements that protect your interests - then maybe equity can be part of your compensation strategy. But remember that even the best-structured agreements can leave you empty-handed when later funding rounds come in.

Free equity on top of your normal rates? Sure, fine - treat it like a lottery ticket. But never, ever discount your rates for it.

Remember: You’re building a service business, not an investment firm. Price accordingly.

I provide advice and coaching for fractional professionals looking to build sustainable consulting practices.