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Not paying Founders salary is illegal ?

Not paying Founders a salary is illegal ?

I was watching Y Combination lectures at Stanford University and on lecture 17 at 32m30s they started to say that not paying founders is illegal and that you have to pay at least minimum wages. Which goes against everything they have been saying before like don't raise money before you have MVP and/or traction and do a lean startup.

Did they mean that all Founders should deposit amount of money they about to be paid by start-up they working at (minimum wage level), have startup pay payroll taxes on Founders wage, then give Founders what left over and then Founders set aside an amount to pay income tax?

https://www.youtube.com/watch?v=EHzvmyMJEK4&t=32m30s

So what is the truth?

19 Replies

Vijay Goel, MD
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Vijay Goel, MD Entrepreneur • Advisor
Founder Chefalytics, Co-owner Bite Catering Couture, Independent consultant (ex-McKinsey)
Per your logic, any small business owner would be fined for not paying themselves. Big difference in labor law between people who are owners (and own a significant chunk of equity or are in a partnership) and those who are employees.

In the early days, minimum wage would be a luxury...it's the hole in your pocket that links to your credit card/ house/ life savings that you need to turn to zero quickly to enable you to survive.
Edward Robertshaw
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Started TinyCall
It depends where in the world you are. Generally as an owner of a business you are exempt from minimum wage requirements. A quick google search should set you right. Also talk to your company CPA (if you are in the US).

That said, make sure you consider the stress to founders finances. It can lead to huge problems.
Michael Brill
1
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Michael Brill Entrepreneur
Technology startup exec focused on AI-driven products
Man, I'm easily distractible.

Seems like 20% equity ownership is the cutoff (see below). But how is that 20% measured? If it's on a fully diluted basis then it's unlikely that most founders will meet this and would be required to be paid. (assumption that entity is a corporation). If it's based on outstanding shares then most would likely be exempt.

http://www.dol.gov/whd/overtime/fs17b_executive.pdf
"Exemption of Business Owners Under a special rule for business owners, an employee who owns at least a bona fide 20-percent equity interest in the enterprise in which employed, regardless of the type of business organization (e.g., corporation, partnership, or other), and who is actively engaged in its management, is considered a bona fide exempt executive."

Scott Milburn
0
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Scott Milburn Entrepreneur
Entrepreneurial Senior Executive and Attorney
Michael Brill, fully diluted does not mean your shares as a percentage of the total authorized shares. It is your shares as a percentage of the total issued sharesplus outstanding options/warrants that have been granted. So, founders will almost always have way more than 20%.
Tom Maiaroto
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Tom Maiaroto Entrepreneur • Advisor
Full Stack Consultant
You can work on your ideas (and company) before getting paid or taking money. This is probably what they are talking about. After you are funded you should have the funds to pay employee salaries. Founders are employees. It's a normal business at this point with funding to provide a runway when there is not yet enough revenue to hold its own. Or...You might be bootstrapping where you do actually have a business that can cover its costs.

Startups are often treated in some crazzzzzzyyyy ways. People will try to get away with anything. It really depends on the people involved and what they are willing to do. At the end of the day, it's a business like any other.

I suppose it's not illegal to not pay yourself though. Gov't doesn't care, they're still collecting taxes.
Michael Brill
0
0
Michael Brill Entrepreneur
Technology startup exec focused on AI-driven products
Scott... that's what happens when you try to do three things at once. Simultaneous with bad financial advice, I just created a mess of some code, and I think there's a pretty good chance I just fed my dog a bag of cookies.

So, yes, you're absolutely right.

OK, back to what I was doing... whatever that was.

Scott Milburn
1
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Scott Milburn Entrepreneur
Entrepreneurial Senior Executive and Attorney
Uh, Michael, of the three I think I'd be most worried about the potential consequence emerging from the tail end of the dog after a bag of cookies!
Michael Brill
0
0
Michael Brill Entrepreneur
Technology startup exec focused on AI-driven products
Not to mention my nausea when I realized that I've been snacking on duck liver treats all day.
Lalit Sarna
1
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Lalit Sarna Entrepreneur • Advisor
Business & Technology Leader
@Tom people will only get away with things if you let them. Investors are just regular guys looking for a good deal. It's all about who has leverage and doing what is sustainable.

An investor who does not respect the needs of the founders does not belong in the deal.

Vice versa, a founder who expects more that what the market is willing to bare does not deserve the investment.

@Max I think this most likely applies to founders who have raised money. Its best get CPA advice on how to do this cleanly but I am pretty sure its possible to get paid in equity, especially if your company has been priced.
Jeff Chang
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Jeff Chang Entrepreneur • Advisor
Startup Guy, ER Radiologist & Hunting for AI
Hmm, thought there would be other kinds of replies to this question.

Per California law, all employees must be paid the minimum wage. The recommendation to pay all founders minimum wage is meant to pre-empt unhappy ex-founder issues. As we've generally heard, ~60% of startups break apart due to founder issues ... if you were to lose a founder or two along the way, they'll have some amount of legal standing in the state of California if they were to argue that you never paid them minimum wage, and they'd have a good chance of winning any lawsuit they might bring against your company in that regard. So, paying minimum wage helps keep that unhappy scenario from happening.

If you're a solo founder, or if you're bootstrapping and haven't yet incorporated, it doesn't really matter. Or if you've done a couple startups with the same people & tend to finish each other's sentences, a founder break-up is less likely & this may not be necessary.

If you're still doing really early-stage prototyping & market-product fit, even a document that specifies how future responsibilities & equity will be divided (i.e., who's CEO, who's CTO, what those roles entail, how your team will go about making big decisions) can be sufficient between co-founders for a while.

Just before you raise a significant seed round, incorporate through Clerky (or find a good startup lawyer who'll defer expenses), put in your paid-in capital & issue your restricted founder's stock to all founders & founding employees (preferably authorize ~10M shares at a par value of 0.0001 or so per share), and consider promissory notes for what each of the founders have put into the company so far (optional).

At that point, you can start paying minimum wage ... if your company can't survive minimum wage based on the size of your seed round, you might consider paying it back thru (agreed-upon but optional) investments by founders into the company in exchange for promissory notes?

Since you're in NYC, not California, I'd consider consulting informally with a lawyer as to whether this actually applies in New York. I'm not a lawyer, so this is not meant to be construed as or used as a substitute for legal advice : )
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