Taking on a new team member and paying only in equity - legal aspects and pitfalls


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Here's my situation. I founded a company very recently (currently an LLC) and have no external funding. I also don't have deep pockets. This is for a startup in the US in Washington state. I declared the initial value of my LLC at 10,000 initially at $.01 per share for 1 Million shares in all. Note the 10,000$ that i declared was mostly IP and prior work and not 10,000 in cash.

I took on an intern to do some work on an unpaid basis for a short time frame. Now I'd like to bring him on board (i.e have him work part time while he finishes school) under an equity only arrangement until I manage to land funding to pay salaries. Here are the broad terms i am considering

  1. Give him equity (stock as compared to stock options) that vests over 3 years with a one year vesting cliff.
  2. Give him some equity that vests immediately as a sign on bonus of sorts
  3. Structure the agreement in a manner that I am not required to offer him any employee benefits like health insurance etc. In that sense I would like the agreement structured much like an independent contractor.

The one glitch here is that he needs a fair amount of mentoring (help with debugging etc) and that seems to blur the traditional distinction between employee and contractor.

I need an arrangement like this until I can get funding to pay salaries. To be conservative I project that to take about a year.

I am looking for pointers on

  • boiler plate legal contracts that cover similar terms. I can find traditional independent consulting agreements but haven't found one with equity compensation that also deals with the fact that I may have to provide guidance to the contractor.
  • A clarification on whether my partner would now be classified as a co-founder
  • Is there a difference between a co-founder and an early employee who just gets paid in equity
  • Is there a better way to achieve what i am trying -which is to pay someone in only equity without having to take them on an "employee" and deal with things like social security taxes etc.
  • Any other issues i should be aware of in an arrangement like this.

thanks

LLC Equity Employees Independent Contractor Legal Documents

asked Dec 5 '13 at 18:53
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Newbie
6 points
  • What country or countries involved? Why does the equity already have value? – Guido Leenders 3 years ago
  • just updated with details on the equity. Note there has not been any independent third party valuation – Newbie 3 years ago
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2 Answers


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Take a look at the book slicing pie - which describes a "moral contact" to assign equity based on hours contributed that can be converted into a more standard equity plan when the future requires it. Whether or not it can be used as a legal contract depends on how you use it.

Having a vesting schedule associated with an equity only salary doesn't seem to be a good idea for the employee - s/he is working, and you are paying them in futures that have additional stipulations. Example: how would you like to work and be told that you earned x but cannot cash it until 3 years out?

answered Dec 6 '13 at 10:22
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Jim Galley
9,952 points
  • just to be clear I am thinking of a component that vest immediately. The rest vests over three years (on a quarterly basis). I don't see this as a full replacement to a salary - its the absolute groundfloor of a startup and I have no funding to do any of this. – Newbie 3 years ago
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In my opinion, the value of the equity is too little to justify a complex setup like this. Legal costs in case of a dispute or just formalizing things well easily exceed the value. Say you transfer 32% of the equity to him/her, current market value according to your estimate is USD 3.200. There is maybe an upside but also a downside to equity, reducing value to 0, so discussions about how much it might become worth is irrelevant, especially since the current IP is worth so little; it is easy to start a copy cat. USD 3.200 covers only for maybe 160 or 320 hours of work at a reasonable labor rate in an industrialized country.

My advice is to offer a minimum salary and limited terms, with in the contract a bonus; when business volume exceeds xyz in year, the salary will be increased to abc.

answered Dec 6 '13 at 19:38
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Guido Leenders
101 points

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LLC Equity Employees Independent Contractor Legal Documents