BrightMove in Recruiting Software Blog , May 20, Start-up companies or struggling organizations looking to fill headcount gaps without the burden that full-time staff can bring often turn to Independent Contractors. This type of worker may not have the long-term benefits and compensation package costs, however, they many times come with a high hourly rate as a trade-off.
Paying Contractors in Company Stock
Is this a viable option for you? Aimed at supporting start-ups and emerging companies, Hanson Bridgett explains in detail what it means to offer stock options and the types of stock you might offer:.
Stock options are a contractual right to purchase stock. The stock is issued to the employees pursuant to an Option Plan adopted by the company.
Generally, the employees are given the right to purchase the stock at a specific price. There are two types of stock options: Incentive Stock Options ISOs and Non-Qualified Stock Options NSOs.
While providing equity as a means to pay the bills may be a grand idea to get the ball rolling on your new venture, be aware of the ways in which this method could possibly backfire if not handled right. The Next Web offers some valuable advice and tips to keep in mind. While equity can be a great tool for compensating early on, the drawbacks are significant. For starters, people tend to grossly underestimate just how much record keeping is involved.
Speed is often of the essence early on in the startup lifecycle, and that often means rushing into casual arrangements. The lack of proper paperwork can lead to issues down the road. Not to mention the fact that every time you compensate with equity, you dilute your own ownership of the business. For these reasons, experts often counsel startups to only give stock to contractors, vendors, and service providers as a last resort.
Independent Contractor Guide - UpCounsel Blog
However, if you are thinking about compensating non-employees with equity, make sure to consider the following points:. You never want to give out equity without proper paperwork in place, period.
All too often, startups grant stock options to people based on a handshake, rather than written contract. Imagine if you grant stock options to a handful of consultants. Without the proper paperwork, it can be a nightmare to reconcile and formalize these past arrangements. Consider adding the following into the agreement to protect your interests down the road:. When compensation packages are tied to deliverables and milestones, it helps incentivize people to be highly effective and help grow your business.
But beyond motivation, there are more pragmatic factors at play here too. By linking number of shares to hours worked or other quantifiable measures, you run the risk of establishing the price per share of your common stock or options. If your business is structured as an S Corporation, be aware that the IRS places certain restrictions on who can be a shareholder.
All S Corp shareholders must be individuals not LLCs or partnerships and legal residents of the United States. While compensating contractors, consultants, and vendors is not for everyone, it can be a useful way to get critical resources for your company when cash is tight.
You can have inactive members of the LLC that have voting rights, but no say in the day-to-day operations of the business. You can also offer shares to those that would be acting in a silent investor-type capacity, with no voting rights or any rights at all outside of profits.
These shares that have no voting or management rights are obviously going to be considered less valuable, however, and could possibly be taxed at a much higher rate.Independent contractors: Good or bad for workers?
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