Startups often engage contractors and freelancers to work on specific projects. The hourly rate of a contract or freelance employee is likely to be much higher than their fair market salary. An individual who might be able to secure a job for $40,000 per year or $20 per hour might easily command $50 per hour as a freelance employee. This is normal because they have to make a living on fewer hours (to accommodate hours spent selling and admin work). Also, employers get the benefit of avoiding things like employment taxes (sometimes), benefits, and other expenses associated with long-term employees.
The fair market rate for these people is their hourly rate. However, it is fair to negotiate a buyout for the company so that the managers can avoid an absentee owner (this is someone who owns part of your company, but is no longer involved). I recommend a payment schedule that increases the buyout price to 200% of the base price. This means that if you can pay them, you do pay them; but if you can’t, you would owe them slices.
You would maintain the right to buy back the slices if you suddenly came into the money, according to the following schedule:
Month |
Buyout |
|
Month |
Buyout |
|
1 |
100% |
|
7 |
155% |
|
2 |
109% |
|
8 |
164% |
|
3 |
118% |
|
9 |
173% |
|
4 |
127% |
|
10 |
182% |
|
5 |
136% |
|
11 |
191% |
|
6 |
145% |
|
12 |
200% |
At the end of a year, you can buy them out for twice what they would have billed a regular client for their work. After that, the buyout option goes away for any billings more than a year old. You may still be able to come to an agreement, but you shouldn’t force them to sell.
Fair Market Value of Time = Hours x Rate
To be clear, the fair market rate that will be used to calculate slices is the calculation above, not the buyout price. Think about it this way, a normal employee charges an annual rate and gets the benefit of being able to keep his slices (subject to termination rules). A contract employee charges a contract rate and, in exchange for a higher rate, is subject to a buyback. At the end of a year the company can’t force a buyback.
If the contractor is going to be working with you over an extended period of time, it would be better to negotiate a fair market salary and include them as an employee, rather than a contractor. Because contractor rates are so much higher than full-time rates it’s not fair to the other employees. Use contractors for limited engagements.