Outside Consultant: How does share compensation work?

  • Updated: December 8, 2013 - 2:00 PM

question

How can an emerging business legally and ethically compensate a project manager or contract worker with “shares” of the company when you may not be able to pay them accordingly?

We have all heard of the famous instance of the graffiti artist who painted a mural for Facebook. How does that work?

Lauren McCabe Herpich

Founder and Chief, Why Not Girl!

Why Not Girl!

www.whynotgirl.com

answer

The idea of share compensation is generally to overcompensate those who have a significant impact on the success of a firm.

A common example in the start-up world would be a company that brings on a software developer for a project that is essential to the business, but the company doesn’t have $20,000 to pay for it. The developer might agree to be compensated in shares, which will likely end up to be worth nothing or worth much more than $20,000.

For the company, this type of compensation aligns the developer’s goals with company goals and allows the company to reduce the amount of capital investment when risk is high.

More importantly, the company should end up with someone who believes in the business, and if the company is successful, then everyone wins. If the business is not successful, then what’s lost for both parties is time.

Of course, compensating with shares isn’t always the right decision, and a lot of time and thought should be put into how to compensate/incentivize a particular employee or contract worker.

If you do decide to go this route, make sure you are clear with that person the risk he or she is taking. This is not only a moral obligation, but also the right way to establish a good relationship moving forward.

About the author

Jay Ebben,

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