Q: I have a startup that I’m trying to get off the ground, and even though I’m confident we’ll be successful in a year or so, I’m currently very low on cash. If I were to compensate an employee with equity do they also need to be paid minimum wage?
A: Yes, they do.
I understand the need for cash-strapped start-ups to come up with creative ways to compensate employees, and I know one of those often mentioned is giving away equity or a small piece of the company. However, startups can not give employees only “sweat equity” in lieu of wages, nor may they completely defer wages until later.
But, as long as you pay minimum wage, there are ways you could partially compensate with equity. For example, if you’re looking for a top-notch software developer but can’t afford to pay a competitive salary, you could share some company equity in addition to the minimum wage. If you go this route, be aware that awarding equity is a complex endeavor –involving vesting schedules, employment agreements, etc.—so consult your lawyer on this one.
There are exceptions to the must-pay-minimum-wage rule. If a person is considered a partner or founder, then it’s okay to compensate them with only equity instead of wages.
The catch? You can’t simply make a pronouncement and make someone a partner/founder willy-nilly, to avoid paying them. “Partner” and “Founder” are legally defined terms that carry responsibility, and those individuals must be listed in the formal paperwork of your business entity. Usually there will only be two of you, and almost never more than four. And yes, there are also complicated forms and tax implications, so again, call your lawyer. Cha-Ching!
Another common option for startups is creating an unpaid internship program. Just make sure you’re familiar with the six point criteria and the paperwork needed to justify not paying the interns in case you are ever challenged.
I am sympathetic and familiar with your predicament. But if you find you’re unable to pay an employee the minimum wage they’re entitled to, then you can’t have an employment relationship. Perhaps they would be open to becoming a volunteer?
© Copyright Eva Del Rio
