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We are incorporating a company, and it is decided that the investor will have 51% shares and divide the remaining 49% shares amongst the five founders.

51% + 49% = 100% share. That leaves zero percent for employee stock.

  • How will the employees be paid?
  • And, what will they be paid from?

Are there many ways to pay employees their salary?

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Why would you give an investor the controlling interest? – Susan Jones Aug 6 '12 at 23:14
@SusanJones 'Cause he is providing us very good infrastructure for our company and also he has very good connections in the society, our company is going to serve! – Akshat Nigam Aug 7 '12 at 3:39
@Susan Jones - see Investor wants 51% shares of our company – warren Aug 7 '12 at 15:45

4 Answers

up vote 6 down vote accepted

You would pay them out of the money the investor gives you. I wouldn't recommend increasing number of shares because it puts bad strains on the investor relationship, and makes it seem like you didn't plan well. One question though with 5 partners, why do you need staff before you're earning profits? Can't you bootstrap it yourself until you start generating revenue?

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So, you mean, employee are paid from company profit? No, I am not hiring staff right now. I am just clearing my doubts. Of course, I will hire them after the company starts earning profit. – Akshat Nigam Aug 7 '12 at 3:42
Well company revenue to be exact.. And the investor will be paid percentage of the profit if that's the arrangement you have – user60812 Aug 7 '12 at 13:00
up vote 1 down vote

When you sell something you make revenue. Revenue covers operating cost and profit

Revenue = operating cost + profit

Operating cost = investment that makes revenue

What makes revenue? The workers and the materials.

If you work in your company as CEO and head programmer or whatever, you can take out a salary.

Your investor does not work in your company, so he does not get a salary (unless you agreed on otherwise)

Also:

Profit = expansion budget + excess

The expansion budget goes into the operating budget of the next financial time segment. The excess is paid out as dividends to shareholders.

Your investor gets the dividends, if any. You can make it so that the dividends are 0 each month, in which case the investor gets nothing, but can still make a profit by trading his shares.

I assume you thought wages were paid via dividends, which is where I imagine your confusion stemmed from.

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sadly, sometimes the "profit" category is negative for a while, though – warren Aug 7 '12 at 15:46
yes, and in that case you're in a deficit. that's when you need to find alternative sources. obviously that tactic is not sustainable. whenever you're struggling, you cover your operating costs with the investment. – user35945 Aug 7 '12 at 16:40
up vote 5 down vote

In this case to award employees company stock you will have to:

  1. Create more stock belonging to the company that it can award
  2. Have each current shareholder return some of their stock to the company

Both of these ideas dilute the current shareholders. You can, of course pay employees out of the company's profits and/or investment money.

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up vote 10 down vote

Shares do not equal salary. Typically, the investor trades shares for cash, and from that cash development, operating expenses and salaries get distributed. Of course, the investor needs to agree to the salaries (can't immediately distribute all the proceeds to salary!) - and in this case, the investor has majority ownership so he gets to state what is acceptable.

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Agreed, salaries are an expense, just like paying the power bill. Furthermore, accrued benefits (such as annual leave) also need to be treated as an expense. – dave Aug 7 '12 at 2:32

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