Saturday, September 29, 2018

Can Startup Founders Get Paid in Equity Only?

It is a fact of life: startup founders do not get paid for their endless work day during the initial set up stage of their company.  Even though they have titles such as a CEO or a CTO, they do not see a penny until their startup gets funded and there is enough money to start the payroll.  But is it legal?

The Fair Labor Standards Act (the "FLSA") applies to most employers.  According to the FSLA, employees must be paid at least the minimum hourly wage.  Some employees must also receive overtime if they are nonexempt employees under the FLSA.  New York has its own wage and hour laws that do not quite correspond to the federal laws.

The FLSA has an executive employee exemption for certain business owners that would apply to startup founders.  According to it, the minimum wage law does not apply to those who own at least a bona fide 20% equity interest in the company and are actively involved in its management.  Good news?!

Not for everybody.  New York-based startups also need to qualify with New York's wage and hour laws, which as I mentioned, are somewhat different.  New York does not have a corresponding exemption that would apply to startup founders.  Its executive exemption (check 12 NYCRR 142-2.14) does not include minority business owners.

So, founders in New York beware:  please pay yourselves at least a minimum wage.

This article is not legal advice, and was written for general informational purposes only.  If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author Arina Shulga.  Ms. Shulga is the co-founder of Ross & Shulga PLLC, a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of corporate and securities law.

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