Company Structure, Formation & Corporate Basics

How startups compensate employees

All employees (including founders) must be paid in cash in amounts at least to satisfy the minimum wage laws established by federal and state laws. Many founders opt to go without compensation in the initial stages, but technically doing so is in violation of the federal and state wages laws. Employees may receive equity in addition to cash payments, but due to tax and other complexities it is generally not feasible to grant them equity in lieu of minimum cash wages. Although the market may reflect standard salaries for different types of positions, there is no requirement that employees receive any more than minimum wage, and the wages employees receive often depend on how large and established their employer is.  

Companies will often grant employees equity (or options to purchase equity) as part of their compensation package (but not in lieu of minimum wages). Depending on the success of the company, the equity may ultimately be worth more than the cash compensation the employees may otherwise have received. So equity is often an important recruiting mechanism and retention tool—especially where the company is cash strapped and needs to pay below-market cash wages. Equity compensation may also better align management goals with shareholder interests.

Employees have become more savvy about both their cash and equity compensation and base their compensation decisions on whether they believe their overall compensation package—cash plus equity—are competitive with what they should expect from a similarly situated employer in their industry. As a result, what is required to compensate the employee of your choice will vary based on market factors and the industry in which you operate. 

Learn more in our CompStudy.