Do I Need to Pay Company Founders?
Welcome to Council Chronicles with CapEx Legal. Today we're going to talk about Founder Pay. Specifically, do you need to pay founders in your company? The most relevant law to this that we're going to talk about today is called the Fair Labor Standards Act or the FLSA. Section 6 and 7 of the FLSA create a rule of thumb.
All employees are to receive minimum wage and are to be paid overtime for any hours over 40 work in a given work week. There are certain exemptions to this presumption and exemptions include administrative, executive, and certain computer employees. And if these exemptions are carefully thought out and if you examine each employee they fall into an exemption, then you don't really need to worry about the minimum wage and or overtime.
Those folks can work 60, 70, 80 hours a week and it's no problem whatsoever. But, what about founders? Well, founder is a tricky concept and in our case we really need to focus on percentage of ownership. If you've got someone that has a 2% ownership in a company and you presume that you don't need to pay them overtime or you don't need to [00:01:00] pay them minimum wage because you're giving them a little bit of equity, uh, as compensation, well, that is not really going to comply with the FLSA.
That is not one of the exemptions. What we need to do is focus on the amount of equity being given and the amount of engagement they have in management. There is a specific exemption under the FLSA for individuals who have at least a 20% ownership in the company and who are actively engaged in the management of the company.
So if both of these qualifiers are met, then you don't need to worry about the FLSA and its minimum wage and overtime requirements. If someone's got 25% equity in the company and they're actively working on it. They don't need to be paid, and you're absolutely fine. However, if you have someone that is maybe a 10% owner, then you do need to worry about minimum wage and overtime.
Then you cannot simply just give them equity, because that would not be FLSA compliant. Were you to deliver someone 10% equity and not pay them anything else, there is a very good chance that that is going to trip you up in the [00:02:00] future. And I understand that a lot of companies have systems like this, where they're startups and they don't really have much money, so they decide to give people equity and not pay them.
This, while it happens frequently, it's not a legal setup. And what you're going to find is that the companies that do get caught are not going to advertise it. If somebody gets caught breaking the law, they're not going to advertise, "hey, by the way, everyone, you should know, I just got in trouble with the Department of Labor".
Instead, they're going to stay quiet about it, and you're not going to hear about the fines and penalties they pay. In some cases, fines and penalties that are going to actually bankrupt the company. It's really important for companies to be in line with labor and employment laws. Both on the federal and the state level and sometimes the local level as well.
And so if you have a founder with less than 20% equity in the company, it's really important to know that you do still have to pay them. Yes, you can pay them minimum wage. And yes, if they're exempt for some other reason, including let's say making the threshold amounts for executive employees, um, then you can side step overtime obligations.
But just giving them equity is not sufficient as a means and basis of not paying them. It's important to note that all of this is just a function of federal law. State laws differ, and in some cases, state laws are going to be a little bit more stringent. They're going to have more requirements on the company, and they're going to be more restrictive.
And in some cases, this 20% rule may not be enough. If you have questions, always reach out to a lawyer when it comes to labor and employment issues. And if you don't have a lawyer, feel free to reach out to me at Capex.Legal. Thanks for joining me at Counsel Chronicles.