Contract with a startup and bill a convertible note?

Some friends have a great idea for a startup. I like the idea, and I think it will succeed, but I'm not in a place to work on it full-time. I can put in time on the side while keeping my day job.

So instead of paying me with a straight equity share, we're thinking about a scenario where I bill as a contractor and their debt to me is like a convertible note.

In other words, if I do a hundred hours of work at $10/hour, they'll owe me a thousand dollars. That debt is due at some point in the future or when they issue shares I can buy them instead.

For the sake of simplicity, assume no coupons and no discounts exist. We'll put all that into the rate I charge.

Are there any problems with this set up?

I offered service-providers to my last startup a deal similar to that and it worked out fine: they either got paid at the closing of the first funding round or they converted their Note into options.

The providers liked it because it gave them a choice and I liked it because I got them to work with me.

Since you are a contractor, you don't have to worry too much about the "deferred payment" problem that an employee would face.

You can do a simple contract that says you can get paid in stock (or warrants) at a particular conversion rate after hitting a specific amount of money owed. I have seen this done before with a bigger company that charged their costs and got the profit difference in stock (actually, warrants).

I would consult a lawyer to get the wording right but you should not have a problem doing such a deal. Just make sure you get the stock (or warrant) terms correct and how it converts.

So the options are?

• a) Act some what as an employee and get paid an hourly rate, that if the company makes money they will pay you. Otherwise they say, company is bankrupt sorry - no money. (All risk, no real (start-up) reward other than the 'possibility' of getting a side paycheck)
• b) If they do make the money to pay you, you can then hold out until they offer official shares in the company and be able to use that couple thousand dollars or whatever to 'buy in.' I guess they will be the one determining when shares are offered, and be determining the valuation of it. So it's quite possible that amount of money is going to be able to buy very few shares?

I don't love it :] If you can bring value to the table and they are quitting / going full-time 40 - 60 hours a week then maybe you can commit to 10 - 15 hours a week for a set amount of equity? You have a job so the money probably isn't as critical as having some fun with your friends and the possibility of a larger long term payout or working with them full time.

Might be worth setting some set hours you will be dedicating to it for some equity. If you are confident in them and the idea. AND assuming they are full time. AND assuming you can commit.

If you can't really commit to any regular hours weekly then the offer they purpose is probably fine, just enjoy having some fun with your friends and if it goes well excellent.