Many early-stage startups lack the cash to be able to pay wages to their workers, and so the founders decide to part with equity instead in order to compensate these workers. However, by doing so, startups can run afoul of the wage laws in their states. For example, minimum wage in Massachusetts effective January 1, 2015 is $9.00 an hour, and is going up a dollar an hour every following January 1 for the next two years. But equity, no matter how it is valued, it is not considered part of an employee’s wage. So a company that tries to make up part or all of an employee’s wage with equity violates wage laws if they are not paying them at least the minimum hourly wage, unless of course the employee qualifies as a “salaried” position. Generally, a position can be salaried (and therefore exempt from minimum wage laws) if it pays at least $455 a week and qualifies as an executive/management, administrative, professional, or outside sales position, as defined by federal regulations. However, that $455 a week salary also cannot be replaced in part or whole by equity. Of course, independent contractors are not subject to minimum wage laws, but as myself and other commentators have written in blog post after blog post after blog post, just because a worker is called an employee doesn’t necessarily make them one. An employee all-but-in-name is still protected by wage laws, entitled to a minimum wage. Like with interns, the best way for a startup to avoid wage law violations with its workers is to ensure that it is paying them at least the minimum wage. And that wage should be in cash, not equity.
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