Whether issuing stock to a consultant in exchange for services or selling stock to an investor, never use percentage ownership without explicitly tying the percentage to a date or, better yet, a specific number of shares.
Let’s say your company hires a consultant and agrees that he’ll receive a 3% ownership stake in the company in exchange for his services. The consultant then sends you his standard form of service agreement, which describes the compensation arrangement like this:
As payment for the services provided by the consultant, the company will issue to the consultant 3% of the company’s capital stock. [BAD]
This seemingly innocuous sentence arguably entitles the consultant to 3% of the company in perpetuity because it doesn’t tie it to a specific date or a specific number of shares. This certainly wasn’t the result you intended, but that’s how the sentence could be interpreted.
If you must use percentages instead of actual share numbers (ex. because the number of shares is a moving target), always reference a point in time. The problem with the sentence in the example above could be ameliorated by specifying when the consultant will own 3%:
As payment for the services provided by the consultant, the company will issue to the consultant shares equal to 3% of the company’s capital stock on the date the shares are issued. [OK]
The better approach, however, is to use actual share numbers so there’s no potential for disagreement. If the company in our example already had 100,000 shares issued and outstanding, we could rewrite the sentence to read:
As payment for the services provided by the consultant, the company will issue to the consultant 3,093 shares of the company’s capital stock, which represent approximately 3% of the company’s capital stock on the date of this agreement. [BETTER]
But there are still two problems with this sentence. First, it doesn’t specify the type of stock the consultant will receive so, if the company has both preferred and common stock, it’s not clear which the consultant should receive. Second, the sentence doesn’t specify whether the consultant is receiving 3% of the company’s authorized capital stock, issued and outstanding capital stock or fully-diluted capital stock. The final sentence should read something like this:
As payment for the services provided by the consultant, the company will issue to the consultant 3,093 shares of the company’s common stock, which represent approximately 3% of the company’s issued and outstanding capital stock on the date of this agreement. [BEST]
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