Hiring someone / bringing a partner on payment via stocks

[chrisx16x2008]

Ok so I currently am the only employee in a business and don't have alot of money. I know someone that would like to work for me and he understands that I can't pay him yet but he'd like stock in return for his work. When I incorporated I put that the company has 5000 stock and I get 2501. I paid $2501 dollars for my stock too ($1 per stock, that amount went into my business account). So I have a few questions...

1. How does payment via stock work? Like If i give him 100 stock what would stop him from just quitting in a week?

2. How can I just give him stock without him paying for them since his payment will be in the form of work.

3. How do stock percentages work? I was reading the bio of Steve Jobs (founder of Apple) and he apparently offered someone 30% ownership in the company for that person to do something for him. like by my calculations I own 50.02% of my companies stock. If I changed my companies stock in reserve from 5000 to say 10000 I would technically have closer to 25% ownership. If I promised someone "30% ownership" wouldn't I be lying if for one reason or another we raised the companies stock cap?

[ArcSine]

1. How does payment via stock work? Like If i give him 100 stock what would stop him from just quitting in a week?
Common protection mechanisms you might write into the deal:
• Stock is subject to forfeiture. If he quits (as opposed to getting axed without just cause, usually) before the passage of some specified period of time, he gives up the stock; it's held in escrow during the forfeiture period. Make sure you get good tax and legal counsel (on all of these issues, but particularly with this one) as it has certain tax complexities for both you and the employee. For example, with the right set of conditions in place, he might be able to defer reporting the receipt of the stock as income until the forfeiture restriction falls away.

• If he bails, he must sell the stock back to the company at some pre-specified price (or valuation computation formula).

• Similar in effect to the previous, his stock automatically converts to a promissory note if he makes for the exit prematurely.

As a side note, these are usually considered as distinct, mutually exclusive mechanisms, but you could certainly mix-n-match elements of these to craft a better deal, if the situation warrants.


2. How can I just give him stock without him paying for them since his payment will be in the form of work.
He exchanges his labor for the shares; that IS how he pays for them. The default tax rule (I'm assuming you're in the US) is that he reports the receipt of the shares as taxable income, but there are certain exceptions under which the reporting of the income might be delayed. These exceptions can get a little tricky to structure properly, and the issue of valuing the shares for income-reporting purposes in the first place can be not-so-simple, so be sure to rent some tax and legal advice.


3. How do stock percentages work? I was reading the bio of Steve Jobs (founder of Apple) and he apparently offered someone 30% ownership in the company for that person to do something for him. like by my calculations I own 50.02% of my companies stock. If I changed my companies stock in reserve from 5000 to say 10000 I would technically have closer to 25% ownership. If I promised someone "30% ownership" wouldn't I be lying if for one reason or another we raised the companies stock cap?
What's important is one's share of the issued and currently outstanding stock, not one's %-age of the total authorized or reserve stock. Those authorized but unissued shares could potentially be important, though, to a shareholder who gets diluted down to a lesser percentage by the issuance of new shares. That's why you'll want some reasonable anti-dilution provisions in your shareholders' agreement.

Best of luck with it, Chris!

[chrisx16x2008]

I appreciate your help!