October 13, 2026
It depends on who the worker is. Employees must be paid at least the minimum wage in cash, and the exempt salary if you treat them as exempt from overtime, even if they offer to work for equity. Founders who own a real stake and run the company can generally work for equity alone, and genuine contractors and advisors can be paid in equity for defined work, as long as it’s documented.
Key takeaways
No. Federal and state law require employers to pay employees at least the minimum wage for every hour worked, plus overtime for non-exempt employees. An employee you treat as exempt must also be paid a salary at or above the exempt threshold, which is $684 a week federally and much higher in states like California and New York. An employee’s agreement to work for equity doesn’t waive these rights, and stock or options don’t count toward wages. Once the legal minimum is paid in cash, you can add as much equity as you like. See Exempt vs Nonexempt Employee and How Much Should I Pay My First Startup Employees?
Generally yes. Under federal law, an employee who owns at least a bona fide 20% equity interest in the business and is actively engaged in managing it is exempt from minimum wage and overtime, with no salary requirement. That covers most founders at formation. State law can differ, and a founder who owns less than 20%, for example one of five co-founders, doesn’t fit the federal rule, so check before assuming it applies.
The cleanest approach is for founders to take no salary and say so in writing, with the founders’ stock vesting over time. If a founder has an employment agreement that promises a salary, don’t just stop paying it. Unpaid salary keeps accruing as a debt the company owes, and it can raise tax issues under the deferred compensation rules. Have the board approve a written amendment that sets the salary to zero, or to an amount the company can actually pay, until it’s funded. See Startup Founder Salary.
Yes. Minimum wage laws apply to employees, not to independent contractors, so paying an advisor or a contractor in equity, or in a mix of cash and equity, is legal and common. Advisors usually get equity under an advisor agreement. A contractor paid in equity should have a contractor agreement with a defined scope of work and an IP assignment, plus a separate equity award approved by the board. See Startup Advisor Agreement and Startup Contractor Agreement.
The risk is classification. If a “contractor” is working full time on your product under your direction, they’re an employee, and the company owes them minimum wage and overtime for every hour, whatever the agreement says. See Independent Contractor vs Employee.
Not below the legal minimum. For non-founder employees, wages up to the minimum wage (or the exempt salary, for exempt employees) have to be paid on the state’s regular payday, and holding them back is a wage violation even if the employee agrees. Pay above that minimum can sometimes be deferred, but only under a clear written agreement, and the deferred amount is a debt the company owes. An oral promise to pay later can still be enforced, so a deferral that isn’t written down creates a liability you can’t see on paper. Have a lawyer and a tax advisor review any deferral before you offer it.
No. A for-profit company can’t accept unpaid work from its employees, and an employee’s willingness doesn’t change that. If you can’t make payroll, furlough or lay off employees, pay final wages on time, and rehire them when you’re funded. Founders who are exempt as 20% owners can keep working, and genuine advisors can keep advising. See What Do I Need to Do When an Employee Is Fired?
Put it in writing before the work starts: an offer letter, advisor agreement or contractor agreement that describes the equity as a number of shares, subject to board approval, with vesting. The board then approves the grant under the company’s equity plan. Equity to employees, advisors and consultants is usually issued under Rule 701, which requires a written compensatory plan or agreement. If the person receives restricted stock, they have 30 days to file an 83(b) election. The tax treatment depends on the type of equity and its value, so have the recipient talk to a tax advisor. See 83(b) Election and Restricted Stock.
In an LLC, “sweat equity” usually takes the form of a profits interest rather than stock. See C Corp vs LLC.
For more, see Startup Employee Equity and Can My Startup Have Unpaid Interns? If you’d like help structuring equity for founders, advisors or contractors, see our Independent Contractor Agreement and Advisor Agreement services or contact us.
