Your TL;DR
Some consulting firms use only 1099 contractors to deliver their work. That setup limits accountability, creates legal blind spots, and leaves you holding the bag when things go wrong. We use only W-2 employees because you deserve consistency, coverage, and a team you can trust.
When startups hire a consulting firm, they assume they’re getting a consistent, dedicated team, a group of experienced, accountable professionals backed by the firm’s quality standards, confidentiality policies, and insurance protections.
In many cases, you’re not getting a team. You’re getting a patchwork of freelance contractors.
We’ve seen consulting firms, especially those offering grant writing or startup services, operate almost entirely with 1099 contractors, not W-2 employees. While that might keep overhead low for the firm, it creates real risks for you, the client.
1099s vs. W-2s: Why It Matters for Your Business
The difference between a contractor (1099) and an employee (W-2) isn’t just tax status. It affects everything from confidentiality to liability. Here’s how:
✅ W-2 Employees: When you hire a consulting firm that employs full-time W-2 employees:
- IP Protection: Intellectual Property (IP) created by W-2 employees typically belongs clearly and unequivocally to their employer (the consulting firm), facilitating straightforward contractual assignment to you and reducing the risk of IP ownership disputes.
- Confidentiality & Non-Competes: W-2 employees often sign clear confidentiality and non-compete agreements with their employer. The employer has direct control over enforcing confidentiality, reducing the risk of leaks or unauthorized use.
- Oversight & Control: The consulting firm has full managerial control and oversight, ensuring consistent standards, work quality, and compliance with client requirements. Training, quality assurance, and adherence to industry standards are easier to enforce internally.
- Liability and Insurance: Firms with W-2 employees generally carry professional liability insurance covering their employees’ work comprehensively, which offers additional protection to your startup. Clearly defined liability structure (errors, omissions, performance issues).
- Stability & Continuity: Long-term relationship building and project continuity are more common with full-time employees who are regularly available and committed.
- Reduces the chance of turnover and disruption mid-project.
⚠️ 1099 Consultants (Independent Contractors). When you hire a consulting firm that relies heavily on 1099 contractors, consider the following:
- IP Ownership Risks: Independent contractors typically retain more autonomy. Unless explicitly defined in a detailed contract, the IP rights may remain ambiguous or contested. Must ensure robust agreements specifying that all IP created during the project belongs to your company explicitly and irrevocably.
- Confidentiality Risks: 1099 consultants may work simultaneously for multiple companies, including competitors. Greater risk of conflicts of interest or inadvertent disclosure unless explicit and strict confidentiality agreements are in place.
- Less Direct Oversight: Independent contractors have greater flexibility in how, when, and where they perform their work. Reduced internal oversight and quality control, potentially increasing the risk of inconsistent deliverables or variable standards.
- Insurance and Liability Concerns: Firms using 1099 contractors may not always have comprehensive insurance coverage for contractor errors, omissions, or negligence. Liability can be ambiguous; ensure your contract explicitly details the liability and indemnification responsibilities.
- Continuity & Availability Issues: Contractors often manage multiple clients simultaneously, creating potential availability conflicts. Increased likelihood of disruptions or delayed project timelines due to competing priorities.
- Worker Classification Risks: Your consulting partner’s misclassification of contractors as employees could inadvertently involve your startup in regulatory or tax-related risks if the IRS or state agencies investigate worker status.
When surveyed, 99% of our clients had no idea this was common practice.
📌 Startup Checklist: When hiring a consulting firm (especially for sensitive tasks like grant writing, IP development, or strategic consulting), ask explicitly:
- Do you employ W-2 staff exclusively, or do you utilize 1099 independent consultants?
- Can you provide documentation of IP assignment clauses or work-for-hire agreements signed by consultants and employees?
- What confidentiality and non-disclosure agreements do your contractors/employees sign?
- Do you carry comprehensive liability insurance covering both employees and independent contractors?
- How do you manage quality control and continuity for projects staffed by contractors versus W-2 employees?
Our Approach: W-2 Employees, Full Accountability
At our firm, all grant-related work is handled by U.S.-based W-2 employees, not gig workers or strangers pulled from a spreadsheet. Our team members are insured, trained, and embedded in our systems and values. They’re accountable not just to you but also to our internal quality benchmarks, timelines, and standards. That’s not just a compliance decision; it’s a trust decision. We believe startups deserve more than a signature on a contract. You deserve a real team with continuity, commitment, and care.
Also, Our Disclaimer: We are not attorneys or a law firm. However, we’ve seen a thing or two in our 10+ years as a consulting firm and understand how federal labor laws can impact startups. For specific legal advice, please consult a licensed attorney.
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We assist our clients in locating, applying for, and evaluating the outcomes of non-dilutive grant funding. We believe non-dilutive funding is a crucial tool for mitigating investment risks, and we are dedicated to guiding our clients through the entire process—from identifying the most suitable opportunities to submitting and managing grant applications.