The digital currency known as bitcoin may be a neat new way to make payments in a flash, but it's also an increasingly in-demand form of compensation among startups
Last year, Finnish software company SC5 dubbed itself the first company to start paying employees with the decentralized currency. This year, the San Francisco-based Internet Archive -- the organization behind popular website archive indexer Wayback Machine -- followed suit.
"Paying salaries as bitcoin was such an experiment with no other concrete objective than learning about bitcoin through practice. We have managed to make such a dull thing as 'paying salaries' more interesting and exciting," says lead architect of SC5 Lauri Svan.
It isn't just useful for startups looking to pay employees. Bitcoins are also being used by startups looking to attract top talent. One company taking the lead on the initiative is San Francisco-based Darby Smart, an ecommerce company focused on providing customers DIY-craft kits.
"Recruiting out here is a war and getting talented people attracted to your company is hard," says Darby Smart co-founder Nicole Shariat Farb. "You have to do everything you can to try to win. We wanted something that showed we are a forward-thinking, risk-taking, fun company and we thought it was bitcoin."
And while it may seem like an attractive perk, before you consider taking the plunge into forking over bitcoin for employees -- whether it be for a PR ploy, a way to differentiate your startup or for the sake of principal -- keep in mind it's a still a slippery slope.
"I believe it is way too early to be compensating employees with the digital currency," says Ryan Himmel, an accountant and founder of online financial-advice platform BIDaWIZ. "Simply stated, it's irresponsible for any employer to do so from a risk-reward perspective."
One risk being raised by Himmel is volatility. Yes, the dollar's value shifts from day-to-day but compared to bitcoin swings, its puny. According to Mt. Gox, a Japanese bitcoin-trading platform, in the last 30 days bitcoin's pendulum swung from a low of $65.42 to a high of $115. It doesn't exactly scream stability, resulting in employees' compensation changing drastically week-to-week.
"As a technology company, our staff is well aware of the risks of purely digital currency, and we know the stories about people losing their bitcoin storages. Luckily, we have had no such incidents this far," says Svan. "Volatility has probably been part of the juice in using bitcoin."
Another issue is how accountants are supposed to manage the payment of bitcoins. While it is evolving, the current method is to treat bitcoins similar to cash and deduct the digital currency from the already-taxed net salary. And from an employer standpoint, when the internal revenue service comes to collect employment taxes, paying in bitcoin is not allowed. Startups must place a cash value on bitcoin and set aside cash to pay income and employment taxes.
And while some tout bitcoin as being a secure environment that isn't hamstrung by the policies of intermediaries, it doesn't mean it is safe. A number of companies including Mt. Gox and bitcoin wallet service Instawallet have been the victims of recent cyber attacks. And bitcoin got a black eye after alternative-payment transfer network Liberty Reserve was seized by authorities who claimed the service had helped launder billions of dollars.
Plus, employers may struggle to even get their hands on bitcoins. The system was developed to only allot for a certain number of bitcoins to exist and an algorithm disperses a limited amount per day, which at present is releasing just 25 bitcoin every 10 minutes.
Despite the downsides, entrepreneurs like Farb are undeterred. "I think by nature people entering the startup world have a higher tolerance for risk," she says. "And with greater risk comes the opportunity for greater reward."
How do you feel about using bitcoin for employee compensation? Let us know in the comments.