Unfortunately, there is no standard “best way” to structure compensation as every company is unique, but there are principles for every startup to think about when deciding which direction to head in.
A startup must think always think about the tax implications and legal effects for granting each type of equity award. You could face a disaster from granting the wrong type of award for your company because the tech startup world is actually a pretty tight circle. If it gets around that your startup is dysfunctional and not compensating consultants appropriately then it will certainly become difficult to recruit new employees or Angel investors.
It’s usually advisable to compensate the independent contractor based on the actual amount of time worked and not a flat percentage. The percentage should be based on a monthly accrual of time spent by the contractor working for the company. By compiling the contractor’s time on a monthly basis, you should quiet the concern that John Bautista pointed out regarding keeping your future employee price as low as possible.
I also invite you to take a look at a SlideShare presentation I put together last year on splitting equity:. However, I wouldn’t recommend that you rely on any material you find online and that you should instead hire a startup attorney because a poor compensation structure can cause some heavy damage down the road for your company.
Check us out atfor a free, no obligation consultation with a vetted attorney. Our platform of attorneys, having drafted hundreds of compensation agreements over the years, will narrow in on your company’s particulars to truly understand what’s structure is best for your startup’s future. Good luck!