Employees vs Contractors
Sooner or later, you’ll be hiring employees and using consultants. In the case of consultants, it’s important to make sure they qualify as consultants. There have been plenty of companies (Microsoft, for example) that used consultants, when actually those consultants should have been employees, and calling them consultants was just a way to avoid paying taxes and providing benefits.
So get advice from your attorney on the difference between contractors and employees.
Compensating Contractors with Stock
As part of the compensation for consultants and other contractors, you might consider paying them partly with stock and partly with money. In particular, for a contractor, you’d be talking about Non Qualified Stock Options (NQSOs also sometimes referred to as NSOs). For more information on stock options, see the Stock Options heading on the Articles and Papers page.
One thing to watch out for: NSOs generally don’t cause any tax consequence when granted because they generally don’t have any clear value. However, if you inadvertently assign value by saying to a consultant “give us a $xx,xxx discount and we’ll give you some number of stock options” then you just put a value on those options, and there might be some tax impact to the contractor. Talk to your accountant for advice.