Should you give stock in your company as compensation for services?
Entrepreneurs are always operating on slim budgets, especially as you start out. But you still need to get certain work done. So it’s tempting to offer stock to someone in lieu of paying them cash for services they perform.
This sounds easy, but first chill and realize that you are bringing on an owner who will have certain rights guaranteed by law. So think about all of the ramifications. Then draft very detailed agreements to make sure all the bases are covered.
Here are 10 questions you should answer before entering into such an arrangement:
1. Can or should some of the service provider’s services be paid in deferred way, such as by the service provider taking a note, with payments spread out over time?
2. Do you have a written operating agreement or shareholder agreement?
3. Is there a written contract for the services?
4. Will that contract be an employment contract or an independent contractor agreement?
5. Should the contractor own the stock personally or should the contractor’s LLC own the stock?
6. What will be the tax consequence to both parties of this transaction?
7. How is the service provider’s services valued? Should there be a discount in the service fee because there of the upside potential of having ownership interest?
8. How is the service provider’s share of ownership computed and may there be future dilutions? Is there a match between the valuation of his services and the percentage ownership he gets?
9. Will the service provider have to sell the shares back to the company if/when his contract ends, or he wants to leave, or is fired, or dies?
10. Will the service provider get a seat on the board of directors, or be allowed to vote at LLC members’ meetings?
This relationship is about to get very complicated compared to a simple company-to-contractor services agreement. I’m not saying you should not enter into a deal like this. I’m just saying everyone needs to do their homework…and document all expectations with written agreements!
Entrepreneurs are going to save the world, and Argent Place Law wants to help. That’s why we are a team of entrepreneur-lawyers to Entrepreneurs just like you. Think how great will it be to have a legal team with entrepreneurial experience on your speed dial so you can call us up and ask, “I want to give stock to my employees or independent contractors to conserve my cash, is that a good idea?” Call Argent Place Law to find out.