As a startup, you might have engaged independent contractors and sub-contractors to provide different services for your business growth. However, limited cash flow is one of the biggest challenges for several startups. So, what are the alternative options for paying contractors? You can offer a share of your company stock and solve payment problems. Several CEOs and entrepreneurs have applied this tactic to make up for financial compensation. You can also check for an independent contractor agreement sample.
Using stock for paying contractors
Equity compensations and stock options are the best offers for contractors. They are a highly attractive package for these contractors. Employers have chosen these stocks as awards. Moreover, company stock can give you the opportunity to complement monthly salaries. Similarly, stocks of companies are attractive incentives for different contractors. It also encourages contractors to work more efficiently for the company.
It is to be noted that attracting highly-skilled contractors is not an easy task. That is why entrepreneurs have tried to spice up their packages with something promising and valuable.
In some cases, small private companies and startups do not have much amount of funds at their disposal. They think that there will be faster growth by making the business public. So, contractors also accept company stocks as the offer. When the stock gains a high value in the future, stockholders find it lucrative.
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How to pay sub-contractors with your company stocks
Paying independent contractors in cash is not always easy. Thus, to pay independent contractors and sub-contractors, you can choose company stock as the payment method. However, you have to select the right options- actual company shares and stock options.
By having a share of the company, contractors own equity. Thus, they will receive a part of the dividend when your organization earns a profit.
When an organization introduces stock options, it presents another party with an opportunity and right to buy company shares at a particular price. Usually, it is the shares’ fair market value when the contractor receives stock awards. It is a highly attractive alternative to both the contractor and the company.
Today, several companies look for hard-working contractors who can do everything for success. On the contrary, contractors start receiving benefits, which can go beyond their standard salaries.
Remaining tax compliant with stock options
The issuance of statutory and incentive stock options does not lead to taxable income. Thus, you may not get an instant profit when you hold the stock for a year. You earn profit by selling the stock. While exercising options, you need to pay standard income taxes.
Your tax payment is based on ordinary income at the time of selling ISOs.
Another option is the incentive stock option, which enables employees to buy company shares at the most reasonable rate. Profits from ISOs are taxed at a capital gain. In the case of non-qualified stock options, employees will not get good tax treatment.
What are the pros of paying your contractors in stocks?
There are several reasons why the company stock can be the most suitable payment method.
– Equity- The most attractive motivator
A professional contractor shows concern about your business performance in the long run. It is especially true when you pay him in equity. This payment option will trigger a financial interest in your business. Thus, the contractor will have an ownership mentality, and it naturally stimulates him to work effectively to achieve the ultimate goal.
– Acquiring the best talent
International contractors often charge a high rate. But, startup founders may not be able to pay that amount. Still, they are in a position to provide these contractors with ownership opportunities. That is why paying in equity is the right way to compete for quality services of the top-tier contractors.
– Conserve capital
As you pay contractors in equity and shares, you can retain money in your bank account. You may use this fund for other business operational purposes.
– Buy-in
Startups have found that the path to achieving success is not without obstacles. Payments in equity will be acceptable only when they think that your business will grow in the future. You must not underestimate those who trust your business vision and goals and stay committed to achieving it.
Options versus shares- Which are more important for contractors?
While issuing equity to your contractors, you have to pick the right type of equity. Some startups prefer issuing options to their contractors. Options refer to the right to buy shares, and the option holder has to satisfy the conditions. These options can be based on performance and time. Why do you prefer options to shares?
It is more common for startups to issue options to contractors and service providers. They think that this step involves minimal risks for their businesses, as contractors do not possess shares immediately.
You might have already chosen the share option for other employees and team members. From an administrative perspective, it will be easier to offer equity to subcontractors. Make sure that your startup has fulfilled the eligibility criteria. Your contractors will be able to obtain the optimal benefit.
What are the demerits of paying your contractors in shares?
Due to your payment to contractors in equity, they will turn out to be your company’s members. Thus, they will gain some legal privileges and have the right to deal with your company’s governance documents. It is also important to note that the value of your shares may be on the rise. There is a chance of overpaying the contractor. Furthermore, structuring the transaction with equity compensation is much more complicated.
You must not offer valuable equity upfront until the contractor has promised quality services. Still, some contractors are not willing to serve your business without compensation for several months and years. The risk appetite level of the parties is also another important factor. However, you should try to find answers to a few questions-
– How much equity should you offer to your contractor?
– What will happen to the executed contract when you have sold the company?
To conclude, it can be said that paying a contractor in a company share has both pros and cons. You have to judge every aspect before making your decision.
