For a pre-revenue, pre-seed, C-corp, what is the recommended form of equity compensation for advisors and independent contractors?

Question (orig. on Quora): What factors should be considered when deciding between NQSOs, ISOs, RSUs, etc.?  Also, what is a reasonable valuation method for determining the FMV without doing a formal 409A valuation?

Answer: The recommended type of equity will vary based on your long-term goalls

The easiest for company that is pre-revenue, pre-seed, C-corp is basic restricted stock.

You can award this at no cost, you can have people purchase it at a nominal cost, or you can do a little of both. Restricted Stock (not RSUs) are exempt from 409A, including the valuation requirement. People can file an 83(b) election (What is an 83(b) election?) at the time of award to limit ordinary income and associated taxes at the time of vest. The awards should have a vesting schedule. Try to align that with your expectations of time to liquidity (of some sort.)

But...Restricted Stock may not be the "best" solution.

Restricted stock means making someone an owner / shareholder at the time of award. This may give them rights, or the perception of rights, that you did not intend.

There are many factors that should be considered (some of the more critical things can be found this document Performensation Top 11 Considerations for Start-up Equity Compensation) .

Since you have specifically referenced Advisors and Contractors (non-employees)...

You can't use ISOs (Incentive Stock Options.) These can only be granted to employees.

NQSOs can be granted to non-employees. You can even arrange to allow for them to exercised before they are vested (essentially allowing people to create their own restricted stock, including the possibility of filing an 83(b) election.) They are common, relatively simple and generally well understood by attorneys and many start-up veterans. They offer great upside potential, but can be difficult to link to specific performance metrics and goals.

RSUs can be granted to non-employees. They act a lot like restricted stock, but people do not become owners until a vesting event. These are the easiest form to link with performance metrics and goals.

SARs (Stock Appreciation Rights) are another possibility. But, they are less-well understood in the Silicon Valley. If you can use NQSOs instead of SARs (which provide almost exactly the same economic value) you probably should.

Phantom Stock is another synthetic form of equity. These awards can be modeled so much like RSUs that they are essentially interchangeable. RSUs are better understood (and sound less like a villain in comic book) so you should probably use RSUs in most cases.

All of that being said, take the time and a little money to bring in an expert. This is not a great area for DIY work. It's a bit more complex than making a bookcase from IKEA, and we have all seen some disasters with those.

The Equity Compensation Design and Use Matrix is also a useful reference tool (2012 Equity Compensation Design and Use Matrix)

What are the salaries and benefits for early stage employees in a startup, such as the first ten hires?

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