The Equity Question
Should you offer equity to your fractional executive? The short answer: it depends on your stage, cash position, and how long you want the engagement to last. The longer answer requires understanding how equity works differently for fractional roles than for full-time hires.
Most fractional executives prefer cash. Their business model is built on diversified revenue across multiple clients, not concentrated bets on one company's equity. But in the right situation, equity creates alignment that cash alone can not match.
When Equity Makes Sense
Equity is appropriate in a narrow set of circumstances. All of the following should be true:
- Cash is constrained. You have less than 12 months of runway and can not afford a full cash retainer. If you have $5M in the bank, pay cash.
- The engagement will last 12+ months. Equity with a 1-year cliff only works if both sides plan on a long relationship. A 3-month project does not justify equity.
- The executive will have material impact on company value. A fractional CFO leading your Series B raise or a CTO building your core product has direct influence on outcomes that drive valuation. An advisory-only CMO contributing 10 hours/month has less direct impact.
- Both sides believe in the upside. Equity is a bet. The executive needs to believe the company has significant growth potential. Otherwise they'd rather take cash.
Typical Equity Grants by Role and Stage
Equity grants for fractional executives are significantly smaller than full-time grants because the time commitment and risk are lower. Here are benchmarks:
| Role | Pre-Seed | Seed | Series A | Series B+ |
|---|---|---|---|---|
| Fractional CFO | 0.5% - 1.5% | 0.15% - 0.5% | 0.05% - 0.25% | 0.01% - 0.1% |
| Fractional CTO | 0.5% - 2.0% | 0.2% - 0.75% | 0.1% - 0.3% | 0.02% - 0.15% |
| Fractional CMO | 0.25% - 1.0% | 0.1% - 0.4% | 0.05% - 0.2% | 0.01% - 0.1% |
| Fractional COO | 0.5% - 1.5% | 0.15% - 0.5% | 0.05% - 0.25% | 0.01% - 0.1% |
These ranges assume the executive is also receiving some cash compensation. For equity-only arrangements (rare and generally not recommended), double the top end of each range.
Structuring the Grant
Stock Options vs. Restricted Stock
There are two primary equity instruments for fractional executives:
Stock options (NSOs). Non-qualified stock options are the most common instrument for fractional executives. The executive receives the right to buy shares at a set price (the strike price) in the future. NSOs are straightforward but create a tax event at exercise.
Restricted stock awards (RSAs). The executive receives actual shares, subject to vesting. RSAs can be advantageous at very early stages when the share price is close to zero, allowing an 83(b) election that converts future gains to long-term capital gains. However, RSAs can create an immediate tax liability on receipt.
For most fractional engagements, NSOs are simpler and more common. RSAs make sense only at the pre-seed or seed stage when share value is minimal.
Vesting Schedules
Standard fractional executive vesting looks like this:
- 4-year vesting with 1-year cliff. Mirrors full-time employee grants. The executive earns 0% in the first year, then 25% vests at the 1-year mark, followed by monthly vesting for the remaining 3 years.
- 2-year vesting with 6-month cliff. More common for fractional roles because the expected engagement length is shorter. 0% in the first 6 months, 25% at the cliff, then monthly for the remaining 18 months.
- Milestone-based vesting. Instead of time-based, equity vests when specific outcomes are achieved. "25% vests when Series A closes. 25% vests at $5M ARR." This aligns incentives directly with company outcomes.
The right vesting schedule depends on the expected engagement length and both parties' appetite for time-based vs. outcome-based incentives.
Acceleration Clauses
Acceleration clauses define what happens to unvested equity in specific events:
- Single-trigger acceleration. All unvested equity vests immediately on a change of control (acquisition). This protects the executive from losing equity in a sale they had no control over.
- Double-trigger acceleration. Equity only accelerates if there's a change of control AND the executive is terminated within 12 months. This is more company-friendly.
- Termination without cause acceleration. If the company terminates the engagement without cause, some portion (25-50%) of unvested equity accelerates. This protects the executive from arbitrary termination before their equity vests.
For fractional executives, single-trigger acceleration is the most common because their engagement is inherently less secure than a full-time role.
Cash + Equity Splits
The most common hybrid arrangements by company stage:
| Company Stage | Cash Component | Equity Component | Example |
|---|---|---|---|
| Pre-seed | $0 - $3,000/mo | 0.5% - 1.5% | $2,000/mo + 0.75% over 2 years |
| Seed | $3,000 - $7,000/mo | 0.15% - 0.5% | $5,000/mo + 0.25% over 3 years |
| Series A | $7,000 - $12,000/mo | 0.05% - 0.25% | $10,000/mo + 0.1% over 4 years |
| Series B+ | Full retainer | 0.01% - 0.1% | $15,000/mo + 0.05% over 4 years |
At Series B and beyond, equity grants for fractional executives are rare. The company can afford full cash compensation, and the dilution impact of equity grants to part-time contributors is harder to justify to investors and the board.
Tax Considerations
Equity compensation triggers tax obligations that both sides need to understand:
For the executive:
- NSO exercise creates ordinary income tax on the spread between strike price and fair market value at exercise.
- RSA grants with an 83(b) election create a small tax liability at grant but convert future gains to long-term capital gains.
- Without an 83(b) election, RSAs are taxed as ordinary income at each vesting event based on the fair market value at that time.
For the company:
- Equity grants to non-employees (independent contractors) must be tracked and reported on Form 1099-NEC.
- The company receives a tax deduction for the spread on NSO exercises.
- Board approval is typically required for equity grants to non-employees.
Both the company and the executive should consult their own tax advisors before structuring an equity arrangement. 83(b) elections must be filed within 30 days of grant. Missing this deadline is irreversible and can be very expensive.
When to Skip Equity
Do not offer equity when:
- The engagement is short-term. Projects under 6 months don't justify equity. Pay cash.
- Cash is available. If you can afford the full retainer, equity is unnecessary dilution.
- The executive doesn't want it. Many experienced fractional executives prefer cash because they've seen enough equity become worthless. Respect that preference.
- The valuation is unclear. If there's no recent priced round or 409A, it's hard to assign fair value to the equity. This creates disputes later.
- You're using equity to avoid paying fair rates. Equity should supplement fair compensation, not replace it. An executive who accepts 80% below-market cash in exchange for equity is either desperate or does not understand the risk.
FAQs
How much equity should a fractional executive get?
Typical grants range from 0.05% to 1.5% depending on company stage and role. Pre-seed companies offer the most equity (0.5% to 1.5%) because cash is scarce and risk is highest. Series A companies typically offer 0.05% to 0.25%. Beyond Series B, equity for fractional executives is rare.
Should fractional executives get ISOs or NSOs?
Fractional executives are independent contractors, not employees. ISOs (Incentive Stock Options) are only available to employees under IRS rules. Fractional executives receive NSOs (Non-Qualified Stock Options) or restricted stock. NSOs are more common because they are simpler to administer.
What vesting schedule is typical for fractional executives?
A 2-year vest with a 6-month cliff is the most common for fractional roles, reflecting the shorter expected engagement period. Some use the standard 4-year/1-year cliff from full-time grants. Milestone-based vesting tied to specific business outcomes is growing in popularity.
What is an 83(b) election for fractional executives?
An 83(b) election allows a fractional executive receiving restricted stock to pay tax on the value at grant rather than at vesting. This is advantageous when the stock value is low at grant. The election must be filed with the IRS within 30 days of the grant date. Missing the deadline is irreversible.
Can a fractional executive negotiate equity acceleration?
Yes. Single-trigger acceleration (all equity vests on acquisition) is common for fractional executives. It protects them from losing unvested equity in a sale event they can not control. Companies sometimes counter with double-trigger provisions that require both a sale and termination.