A better plan for an offer like this is deferred compensation.
Normal investors, especially the YC group who exploits kids fresh from school, think this is insane. Workers should not be payed in equity. Only rich people should become richer.
But for WotC it worked out well. I would prefer the WotC model, over accepting peanut money from YC.
See http://www.peteradkison.com/blog-entry-2-wizards-of-the-coas... for further reference.
This is still a bad idea for a number of reasons. The most notable: the author clearly lacks all understanding of the implications of what he's asking for.
1. The author's client would need to prepare the legal documents for his equity compensation package, which could easily cost several thousand dollars. Depending on the structure of the compensation, the company might have to bear additional costs. For example, a 409A valuation can easily exceed $20,000. Please note that 409A can apply to a variety of deferred compensation structures, so your suggestion that the author seek deferred compensation is not necessarily a good one.
2. If the author wants stock options, he would only be eligible to receive non-qualified stock options. These lack the advantageous tax treatment of ISOs.
3. If the author receives stock outright with no vesting, the full value of the stock would produce immediate taxable income.
4. If stock the author receives is subject to vesting, he's going to want to look at an 83(b) election if he doesn't want to find himself in a world of hurt.
5. All of this is complicated by the fact that the author is a foreigner. The UK has a tax treaty with the United States, but he'll want/need the counsel of a competent accounting and legal professional in both countries. Additionally, in some scenarios, the author may not even be able to work with a US company. For example, he could not be a shareholder in an S-corporation, as foreign ownership of an S-corporation is forbidden.
If the author knew the burdens he was placing on his prospective clients, and more importantly himself, it's unlikely he would ever offer his services in this fashion. So as valuable as his skills and experience might be, I would argue he's doing himself a disservice by trying to sell his skills and experience in this fashion.
All a vesting schedule does is state when certain restrictions associated with the stock (or stock options) lapse.
Classification does not matter, except for incentive stock options, which are not possible here. You can grant non-qualified stock options to contractors and you can of course issue stock (restricted or not) to just about anyone.
That's why deferred compensation isn't of interest.
Also your post implies you are looking to do this for multiple startups. Not only does this kind of send a bad message that you'd not be that invested in a company you literally owned, but it also reduces your risk profile since you are trying to "diversify."
Your incentives aren't going to align with those of any rational founder. The people that will take you up on an offer like this are disproportionately likely to fail; the ones that succeed are likely to regret having given up equity to a nights-and-weekends contractor. Note also that this is a signaling issue; the cap table of a startup comes up pretty quickly in due diligence.
I really think giving equity to contractors is a bad idea.
Why not instead sign up for a scaled deferred compensation plan? You could ask for 2x or 3x what your normal rate would be, perhaps scaled by the startup's first valuation. You'd capture some of the upside, but not an unbounded amount, and you'd be along for the ride without the baggage that comes with ownership.
I keep reading "percentage" and that word makes me nervous.
For example, a founder asks for help building an iphone app MVP (it's a very simple app, gives you recipies for great coffees for example) - I would probably be looking for 8-12%. This would be on the basis that he has put the legwork in to approach outside investors, has put together a reasonable pitch with backing, etc and may be expecting to sell the app 30,000 times for $0.99 within the first 18 months from launch.
Maybe for a more complex, time consuming and bigger project, I would ask for perhaps 15-18%.
As I say, all depends on the project and it's individual complexities.
Making you sweat yet? :)
There's three problems with your plan:
First, if the high-end of what you'd think of asking is 18%, then it seems likely that even the low end of your ask is in the founder/first-employee range. You're talking about numbers that hired CEOs get.
Second, the stake you're looking to take in these companies practically guarantees conflicts down the road; you're asking for so much that you're going to have to take an intense interest in valuation and dilution concerns. Who involves a contractor in things like that? Who gives a contractor a veto on funding or acquisition? Who funds a company that values 8% of their company so low?
Third, despite having risked virtually none of your own capital (again: evenings and weekends, divided among multiple companies), you're asking for a share comparable to what early employees who dedicate themselves to the company and take reduced salaries get; those employees, by the way, will all vest, unlike you.
I don't think this is a workable plan.
I think there may have been an interesting conversation in the 0.1-0.5% range, although my plan was to explain why it's dumb for both sides to give 0.1-0.5% of a company to someone as direct compensation for a transactional service, and how you could have made more money and made startups more happy by coming up with a clever deferred comp scheme pegged to equity valuations.
But at 8-18%, I'm not sure where to go with this.
Technical cofounder
This should be reviewed with a lawyer, because I believe it adds tax/accounting complexity for both sides (but maybe not in UK?). Also, if we're talking common stock, this would force an early startup to balance keeping their share price low and thus paying a lot more stock for the value provided, or raising the share price (possibly too high, too soon) in order to pay less.
Edit: Saw your reply to the OP, below. I do agree that an experienced, rational entrepreneur would likely steer clear of any arrangement like this, to have a clean cap table and to avoid dilution. But of course "the right way" to do things changes over time, and there is a real shortage of technical talent. So I don't think it's crazy to see something like this become a trend.
Oh I'm sure the startup would prefer deferred compensation, but it makes no sense for the contractor. He'd be taking all the risk.
Or, if he wants some of the upside, structure it as a convertible loan. That actually may be a better idea for both parties, rather than a straight up shares for work trade.
Plus, using 3-4x rates would be awful when talking to investors. The opportunity/contractor inflated rates would quickly dilute any investments over time.
EDIT: I'm agreeing with tptacek. Trying to compensate a part-time contractor to get founder-level equity (eg. 10%) in proportion to "time put in" would be bloody insane!
I'm arguing the contractor should be compensated fairly. We're going through this entire exercise because the founders don't want to pay the contractor a market wage. So the service that is rendered should either be structured as a loan (convertible or otherwise), or the contractor is compensated with shares proportional to the amount of work under a fair valuation of the company. Don't like those options? Pay the man for the work he did. What's the alternative? Work for free?