Recalibrating Founder Equity Splits After Extended Unpaid Service
Uncompensated founder labor creates informal debt that requires valuation at market replacement rates before equity splits can be recalibrated cleanly.
salary conversion
Meaning
Compensation agreements that exchange a portion of a fixed cash salary for shares or other non-cash assets help startups manage their burn rate. By using salary conversion, a founder or early employee can reduce the immediate cash pressure on the company. This arrangement ends when the specified amount of equity is issued or the person returns to a full cash salary.
Cash Conservation
Reduction of the monthly outflow of money allows a young company to survive longer on its initial capital.
Equity Valuation
Valuation of the labor and the equity must be agreed upon by both parties. In a salary conversion, the number of shares given in the exchange depends on the current price of the stock. This often requires a formal legal agreement to ensure the tax treatment is handled correctly.
The conversion must be recorded on the cap table.
Final Adjustment
Agreement terms stop being active once the shares are granted. After a salary conversion, the employee may have a new ownership stake but their monthly cash pay returns to the normal level. No further equity is earned unless a new agreement is signed.
The record of the conversion remains as part of the employment history.