An important part of hiring employees is deciding how to compensate them. Because of limited capital, startups often implement equity-only compensation or deferred compensation arrangements in lieu of regular salaries. However, such arrangements are unlawful, even if the founder or employee is a willing participant.
All employees must receive at least an hourly minimum wage, which varies by location (including higher minimum wages in cities like San Francisco, Los Angeles, Seattle, and New York), plus overtime as required by state and federal law. If employees are exempt (salaried), they must make a minimum salary amount depending on their exemption, which is also determined by location. Failure to pay wages to employees (or to defer pay) is a violation of employment laws, raises tax concerns, and can result in liability for startups and their founders (as well as officers and directors). Further, it can jeopardize the validity of intellectual property assignment, since employees will not have received proper consideration (i.e., wages) for their assignment. This is especially problematic for technical roles like engineers and scientists.
Unlike employees, there is more leeway for compensating properly classified contractors. They can and often are paid a flat rate, only given equity (i.e., no cash compensation), or provided other benefits in lieu of pay that would be unlawful in an employment relationship.
For more detail on hiring and terminations for startups, click here.