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The Best Option

Can a startup on a budget use stock rather than cash as a hiring incentive?

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This story appears in the May 2008 issue of Start Up.

Question:I've started a successful company and invested about $100,000 of my own into it. I want to hire an operations manager and give him 30 percent of the stock in my company as an incentive, but he doesn't have any cash to contribute to the company--only his labor. What's the best way to legally do this?

Answer:People who become owners of a startup without putting up any of their own money as capital contribute what is known as "sweat equity." You can give this person stock, but he'll get a nasty surprise at tax time. If your company currently has a value of at least $100,000, by giving him 30 percent of your stock, you're giving him $30,000 in compensation, and he'll have to pay taxes at ordinary income rates on the full amount this year. Sadly, the doesn't accept stock as payment for taxes--he'll have to come up with the cash. You have a few other options:

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