I am currently offering people who work on our start-up 0.05% option to purchase vested on the 3 month to 9 month schedule. Have you had this situation before? What is fair?
These type of questions are always hard because you need some basis for getting everyone comfortable with whatever you offer. My suggestion is to try and create some basis for your numbers that you can explain.
One example would be something like this. We plan to work for 1 year before we get funding. At the time we get funding we want the value of our IP to be $1M and we have 1M shares so each share is worth $1. Then, you can just allocate stock based on what you would pay for salary. If an employee would get hired at $10K/month they can vest 10K shares/month, etc.
The hard part is really putting the model together with numbers you're comfortable sharing with the employees so they see that the system is fair and equitable. For that I would start with what percentage you want the total group of employees to own 1-2 years out, estimating how many employees you will have and then back into numbers that make it all work out.
I'm assuming from the post title that you are referencing consultants vs. employees. Decisions about employee equity would be different.
Presuming that you are looking at how to pay consultants in lieu of cash, I would second what Dane has set forth and expand upon it a bit.
Step One: Come to a decision as to what you would pay the consultants if you had the cash available to you.
Step Two: Determine the methodology for valuing the company - both now and during the time that the consultants will be providing services.
Step Three: Set forth an equity plan (probably option based) that combines steps 1 and 2, and addresses (a) any vesting schedule you would like and (b) fair discounts to your valuation.
Let's stick with Dane's example (slightly modified):
Assume you value the consultant's services at $10k/month fair market (if you were paying cash).
After performing a valuation analysis, you determine that the current pre-money value of the company is $4,500,000 (without knowing your circumstances further, it's difficult to determine what a realistic valuation is likely to be).
Now you can offer the consultant options as compensation for services.
Perhaps you might start with options to purchase 0.66% of the company ($30k/$4.5mm) at an effective $4,500,000 aggregate strike price, issued 90 days after the first services are performed. By setting the strike price at the valuation, you are aligning the consultant's upside with your own. Any real value to the consultant will come only after an increase in the value of the company.
Thereafter, you could set up additional monthly or quarterly option grants using this methodology. Be sure to adjust the valuation as changes in the business call for such.