Equity for strategic hires?

We're a small (but growing) consulting firm with software to be developed as a side stream (yes, I know this is an original story :)). 3 partners, equal equity.

We've worked with a few people in the past that are very, very good and they have a lot of industry experience and contacts (most of our clients are in a niche market) as well as key contacts with vendors.

It seems like whenever we approach them, everyone is looking for a piece of our pie (so to speak). It's likely partially the way that we're discussing what we want to do and partially because we surround ourselves with people like us (entrepreneurs, etc.).

I have two immediate questions:
- if we do decide to slice the pie, how do we determine how to slice it? (amount of pie being sliced off)
- how do we determine whether to slice the pie in the first place?

We did a pros/cons list for one individual and then an analysis of what hiring him will do for the business in 6months and a year (from a billability as well as the business he can bring in from his past work). What metric do we use to determine how big a partnership would be appropriate? If he doubles the business in a year? Vesting schedule? Salary while vesting? Currently we're taking low salaries and distributions in order to make a decent living while saving on taxes. Obviously if he became an equal partner he'd get the same treatment. But if we put him on a vesting schedule (say 5%/quarter up to 20% with acceleration "bonuses" if he brings in more business than anticipated) how do we pay him a reasonable salary since his profit distributions will be smaller?

At this point we've told him that we're not really willing to slice the pie just yet. I am worried that in 6 months or a year we'll look back and play the "shoulda-woulda-coulda" with this opportunity (although maybe in 6 months we'll be more mature and can make a better pitch to him with less equity in the mix).

Roll this forward. Could or should your business work with 5 equal partners? 10? Would you like that?

If your answer is 'yes' then you need to come up with a way of making that happen that manages your risk through new people. Fortunately, there's no need to re-invent the wheel here, as plenty of professional service businesses work this way under both partnership and company legal forms. And that includes a variety of ways to resolve the probationary period.

If your answer is 'no' then you need to have a serious discussion amongst yourselves about how many equal partners will be enough - and whether in fact you're already there.

In that case, you need to look at remuneration for non-partners. You need to decide if you are going to offer equity at all, and look at basic tools such as salaries, bonuses and profit share.

What if you don't know, but you really want that person on board?

Then that's also a 'no.' Negotiate within that framework. If you can't reach agreement and they walk away, and you all agree that was the wrong result for everyone, you can re-think. And if you do decide to go all out for 'yes' - you may want to re-connect with all those prospective joiners rather than bringing in the last walk-away by default.