

Salary for Founders of a Broke Startup - Palantar

I know that Y Combinator recommends that startups pay their founders to avoid legal hiccups later (Lecture 18 from How to Start a Startup) - but what about startups that are side projects with no investment?  Is it still legally required to pay the founders?  Do the founders have to loan money to the startup so that it can pay them?
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smt88
It's never legally required to pay the founders. The founders' equity, which
should be vesting over time, can be considered their only compensation. Be
forewarned that this can still lead to massive tax pains later on if an 83(b)
election isn't filed[1].

No matter how broke you are, you should be able to find a lawyer who can help
you get set up. You can use the same founding documents, amendments, and
appendices for your future bootstrapped ventures, so it's worth doing it
right.

Some firms will take equity in exchange for legal work, so that's also
something to consider. I've never used a firm like that, so I don't know how
that all works.

A dangerous and _extremely_ common side effect of doing your own legal work is
in-fighting with co-founders. When you have rock-solid, thorough founding
documents, you've already agreed on what to do for an exhaustive list of
contingenies: what happens if someone wants to leave, if someone isn't pulling
their weight, if someone dies, etc. etc. My founding docs are about 50 pages.

It's extremely important that you set everything up right, and it shouldn't
cost you more than $1,500. I've known firms that will give you a boilerplate
package for your particular state for about $500, so shop around.

1\. [http://www.startupcompanylawyer.com/2008/02/15/what-is-
an-83...](http://www.startupcompanylawyer.com/2008/02/15/what-is-
an-83b-election/)

~~~
Palantar
Yeah, we did everything through Clerky which is recommended in the Y
Combinator lecture I mentioned (
[http://www.dol.gov/whd/regs/compliance/fairpay/fs17b_executi...](http://www.dol.gov/whd/regs/compliance/fairpay/fs17b_executive.htm)
) - which unfortunately is the same lecture that states quite strongly that
you should always be paying minimum wage...

~~~
smt88
(I'm not a lawyer. None of the following is legal advice.)

1\. YC is not gospel, and (by definition) none of their companies are
bootstrapped. That means their experience and advice aren't necessarily
targeted at people like you.

2\. Clerky isn't a substitute for a real lawyer. You and your co-founders
might have needs/preferences that aren't represented by a "fill-in-the-blank"
document.

3\. Clerky is YC-backed, so the recommendation to use Clerky should be taken
with a grain of salt.

I can't stress this enough: _talk to an experienced, real-life startup
lawyer_. There is no substitute. I know that seems old-fashioned or
inefficient to our crowd, but I've learned the hard way on several occasions
that you shouldn't do your own legal work. The cost of getting a professional
to do it is so low that it's a no-brainer.

Related to the law you mentioned: it doesn't matter what the vesting schedule
is. 20% is 20%. Furthermore, the law is similar to the internship law. Someone
has to feel wronged and then report you to the govt or sue you in order for it
to be a problem.

Basically the law is trying to protect early employees from being exploited.
It's not really targeting founders. Of course, you should verify those
statements with a lawyer, as I might be wrong.

------
brudgers
In my opinion:

The legal structure of a company should be tailored to its capital structure
and owner's interests. Delaware C corps are a reasonable choice for companies
that have passive investors and whose owners are striving toward increasing
outside investment to fund rapid growth.

In the side project state or early prototype state, another simpler less
costly form may make sense. An LLC can be acquired by a C-corp when and if a
C-corp becomes more appropriate to the immediate future capital structure of a
company. What matters early on are:

    
    
      how control is structured
      how new founders may be added
      what happens ifwhen a founder leaves
      what existing assets [intellectual property] are assigned
       to the company.
        
    

While it may not be long lived for a company that takes off, there's a cost
for optimizing for a growth model that may not happen.

------
iblaine
AFAIK no legal requirement exists saying a founder must have a salary greater
than $0. But founders must find value in their compensation package in order
for them to not quit. Pay them nothing and they're that much more likely to
quit.

------
aravan
You trade your present time for future return while working on side projects.
You might have different outcomes, your side project would have got traction,
you can move on with idea to startup. Or it may help you to find early
invester or co-founder through that.

If everything else failed, side-project definitely helps to find a suitable
technical job that fits your resume, because you spend a lot of hours on
working on technology you liked. When you are not succeeding, don't forget to
open source your work. That add credit, too.

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Palantar
I may have actually found a legal reason for this. I found an "Exemption for
Executive Employees" \-
[http://www.dol.gov/whd/regs/compliance/fairpay/fs17b_executi...](http://www.dol.gov/whd/regs/compliance/fairpay/fs17b_executive.htm)
\- wherein it appears to me (also not a lawyer) that anyone who owns at least
20% interest in a company is exempt from minimum wage requirements. Since
everyone involved owns more than 20% I think this one is good enough for me!

~~~
Palantar
And then the counter to my counter-example that I don't know is whether or not
it still counts as at least 20% interest if at least 20% of the interest
hasn't vested yet...

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darkmethod
Obviously, I don't have all the information to make an informed opinion. Also,
IANAL. No cash to pay salaries might be indicative that its time to shutdown
or at least seriously contemplate doing so.

~~~
smt88
Disagree (in some cases). Many side projects will go months with no cashflow,
which is fine because the owner(s) have day jobs.

No cash to pay salaries for a funded or full-time startup does mean that the
startup is dead, though.

