
Ask HN: Carolynn Levy of YC said Not paying Founders a salary is illegal, is it? - himax
Carolynn Levy YC lawyer said Not paying Founders a salary is illegal, is it?<p>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&#x27;t raise money before you have MVP and&#x2F;or traction and do a lean startup.<p>Please don&#x27;t comment without watching the video from 32:30 to 40:10, unless it&#x27;s a link where it was thoroughly discussed.<p>https:&#x2F;&#x2F;www.youtube.com&#x2F;watch?v=EHzvmyMJEK4&amp;t=32m30s<p>I have to incorporate Now and start working with co-Founders and contractors and pay equity to them and assign IP and bind people with NDA, non-compete and IP assignment in relations to the company and raise some seed money. But YC term is still 4 month away.<p>BTW: We will be doing Dynamic Equity splitting similar to what is in &quot;Slicing Pie&quot; book by Mike Moyer.<p>So what is up with this &quot;pay Founders a salary&quot; ?
Aren&#x27;t all Founders that invest time into start-up are exempt from minimum wages even if they only have 1% and monetary compensation laws do not apply to them or do we need to sign special agreement between Founders to pledge that we are independent contractors and not employees of a company for the time being?<p>Which exact part of any law demands paying active Founders?<p>I will be very thankful if someone can explain this to me and everyone else, because people on the net have been asking this same question.<p>Max
======
dalke
I'm going to comment even though I didn't watch the video, to point out an
earlier discussion on HN at
[https://news.ycombinator.com/item?id=7521979](https://news.ycombinator.com/item?id=7521979)
.

~~~
himax
Thanks.

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solve
Just my experience, for every possible thing that you could do that could be
related to accounting, you can find at least one accountant who will insist
that it's illegal.

------
tjpd
You really need professional employment counsel to respond to this properly &
IANAL but here goes...

"Not paying Founders is illegal, is it?" Most likely, yes.

"Which exact part of any law demands paying active Founders?" There is no
"exact part of a law" that demands it. You don't just look it up. That's not
how the law works. There is a whole host of federal and state minimum wage
legislation as well as precedent case law that would come into play. You
cannot point to an "exact part" that requires "active Founders" (a term that
the law doesn't recognise) to be paid minimum wage. Dig through [1], [2] and
do a precedent search on LexisNexis or Findlaw if you're really interested.

Look, paying minimum wage is a legal requirement in the US. There is a small
set of exemptions that allow companies to pay below minimum wage. The
executive exemption [3] is one such exemption. These exemptions usually come
with tests that you have to satisfy in order to qualify for the exemption. For
example, according to the DOL [3] there are 4 tests, ALL of which must be
satisfied to qualify for the executive exemption:

1) salary based comp > $455/week 2) primary duty is management 3) directing
work of >2 FTEs 4) hiring/firing authority

An "active founder" in your situation who is not responsible >2 FTE would fail
this test & therefore fail this exemption. There are probably other exemptions
you could look to use instead. Your founders might or might not qualify for
those as well, depending on your exact situation. Not paying her/him might or
might not therefore be illegal.

The main problem is that you're completely missing the point.

Firstly Carolynn's advice is largely talking to startups that are YC-funded (&
beyond). Secondly her advice is a reflection of the consequences & the risks
involved, not some legal sub-clause. Do you want to risk falling foul of state
& federal minimum wage law? Do you want to fall foul of payroll taxes? The
answer is no. You do not. In the event you and your founder fall out (as
Carolynn goes on to discuss) your life will be so much worse. Delinquent
employers, minimum wage abusers do not fare well in a judge & jury court let
alone the court of public opinion.

This is a complete non-topic. You are focused on a technicality & some
overblown/imagined idealogical conflict, when instead you should just take
Carolynn's very good advice and pay yourselves minimum wage if you can.

[1]:
[http://en.wikipedia.org/wiki/Minimum_wage_in_the_United_Stat...](http://en.wikipedia.org/wiki/Minimum_wage_in_the_United_States#History)
[2]:
[http://www.dol.gov/dol/aboutdol/history/flsa1938.htm](http://www.dol.gov/dol/aboutdol/history/flsa1938.htm)
[3]:
[http://www.dol.gov/whd/regs/compliance/fairpay/fs17b_executi...](http://www.dol.gov/whd/regs/compliance/fairpay/fs17b_executive.htm)

Again IANAL.

~~~
himax
Thanks for your reply.

"The main problem is that you're completely missing the point." Sorry, can you
be a little less confrontational?

"This is a complete non-topic." "...pay yourselves minimum wage if you can."
And if I can't pay myself and several more founders? Would that make it a
"Yes, topic" ?

I don't trust just one person's proclamations, specially when it makes no
sense and there is no explanation, just a directive.

What sense does it make for all Founders depositing into start-up their post
tax saving just so that start-up pay them back those money minus second income
tax, minus second FICA & Unemployment insurance deductions for next 6-12
month?

That doesn't make sense to me. Because that prevents almost all tech startups
to legally exist.

Thanks again for your comment.

~~~
tjpd
It's always hard to convey tone of voice well online. Sorry.

"And if I can't pay myself and several more founders? Would that make it a
"Yes, topic" ?"

No, it's still a non-topic. If you can't pay your founders minimum wage you
still have the same two choices: do a start-up or don't do a start-up. If you
chose to do a start-up, know that you are taking on the additional risk that
you might be breaking minimum wage laws and/or one of your founders can take
you to court over it.

"What sense does it make for all Founders depositing...?"

The sense of it, is that it removes the risk of you breaking minimum wage law.
That's ignoring all the positive social good of all those things. As
NeutronBoy mentions you're literally describing how business works.

"that prevents almost all tech startups to legally exist"

No, it doesn't. I think your confusions stems from misunderstanding how law
works & how law is enforced. Law is not proactive & the law is not binary.
Minimum wage law cannot prevent "a start-up to legally exist". As Kirsty &
Carolynn point out several times in that video your startup is a separate
legal entity, one that exists from the point of incorporation. Assuming you've
incorporated your start-up exists. Minimum wage law can't make it un-exist. A
law or statute can't prevent it from existing. The clearest evidence for this
is that thousands of start-ups do exist & that >0 them probably haven't paid
minimum wage.

~~~
himax
Yes, I described how "some" businesses do it, most of them fail by 5 year mark
or earlier and most of them don't give equity to early employees and don't
have founders that work for equity, those are "some".

In contrast, most high tech or newer generation of self educated founders
start without any money till there is an MVP and if some money are needed they
are almost never allocated for complying with minimum wage laws to pay to
equity earning founder, because in most businesses there is a more pressing
need to pay for unavoidable things without which business wouldn't exist at
all.

I perfectly know how law works, you just didn't picked-up on an emphasis of
"legally" that was kind of obvious, meaning was "exist in legal compliance" I
could have phrased it more accurately and you got me there, but it was more of
an emotional typing than a prepared essay.

------
ghufran_syed
I think you're asking the right question, just the wrong way. Your question
comes across (to me, and possibly others) as "prove to me that not paying
myself a salary is illegal?", when I think your real question is "Does it make
sense to do this, given the other competing demands on a founder's time?" My
personal take is that if you're successful (let's use getting to your first
actual cash compensation non-founder hire as a proxy for this), you can fix it
at that time, if you don't make it that far, it's just as well you didn't
waste time on it.

Besides, you probably commit "3 felonies per day", what's one more? :-)
[http://www.wsj.com/articles/SB100014240527487044715045744389...](http://www.wsj.com/articles/SB10001424052748704471504574438900830760842)
[http://www.amazon.com/Three-Felonies-Day-Target-Innocent-
ebo...](http://www.amazon.com/Three-Felonies-Day-Target-Innocent-
ebook/dp/B00505UZ4G/)

The following section of Paul Graham's essay "Why startups condense in
America", at
[http://paulgraham.com/america.html](http://paulgraham.com/america.html) is
relevant:

"7\. America Is Not Too Fussy.

If there are any laws regulating businesses, you can assume larval startups
will break most of them, because they don't know what the laws are and don't
have time to find out.

For example, many startups in America begin in places where it's not really
legal to run a business. Hewlett-Packard, Apple, and Google were all run out
of garages. Many more startups, including ours, were initially run out of
apartments. If the laws against such things were actually enforced, most
startups wouldn't happen.

That could be a problem in fussier countries. If Hewlett and Packard tried
running an electronics company out of their garage in Switzerland, the old
lady next door would report them to the municipal authorities.

But the worst problem in other countries is probably the effort required just
to start a company. A friend of mine started a company in Germany in the early
90s, and was shocked to discover, among many other regulations, that you
needed $20,000 in capital to incorporate. That's one reason I'm not typing
this on an Apfel laptop. Jobs and Wozniak couldn't have come up with that kind
of money in a company financed by selling a VW bus and an HP calculator. We
couldn't have started Viaweb either.

Here's a tip for governments that want to encourage startups: read the stories
of existing startups, and then try to simulate what would have happened in
your country. When you hit something that would have killed Apple, prune it
off.

Startups are marginal. They're started by the poor and the timid; they begin
in marginal space and spare time; they're started by people who are supposed
to be doing something else; and though businesses, their founders often know
nothing about business. Young startups are fragile. A society that trims its
margins sharply will kill them all."

