A Mistake To Avoid In Employee Compensation At Sart-Ups

employee compensation at start-upsIt’s common for start-ups in the Bay Area that are low on funding to compensate their employees by granting equity only and without providing any actual salary or hourly pay. This is a mistake that entitles any such employee in California to make a claim for unpaid wages, interest, and possibly penalties. Many start-up owners assume that just because they themselves are only compensated with equity, and their company doesn’t have the money to pay their employees, it’s fair to pay their employees with stock options only. It might or might not be the fair thing to do, but in California it’s definitely not legal.

California labor code is very clear on this – an employee should be paid for every hour of work. Stock options are not pay because they don’t have have immediate (liquid) value. The law does not exempt employers from paying wages to their employees just because they don’t have the money to pay or just because the owner doesn’t draw salary, so this is not a valid defense in a potential claim or a lawsuit for unpaid wages.

Although laws in other states allows company not to pay those employees who who hold a certain % of ownership / stock in the company, this is not the case in California – at least not yet. Therefore, start-ups should at least pay their employees minimum wage to avoid liability for non-payment of wages, regardless of whether these employees also receive stock options.