NSS busts ex-Yerevan mayor Beglaryan / Money laundering / Property theft
NSS report says: in 2009, Yerevan mayor Beglaryan colluded with Center District officials to embezzle property.
They organized an illegal scheme to donate 4 properties worth $488k, located on "expensive" streets, to an accomplice, who then sold them to Beglaryan's family for pennies.
The properties, in reality, belonged to Beglaryan. He used others to launder and conceal the theft. A felony case is launched.
https://factor.am/277085.html other criminal cases involving Beglaryan On March/24/2020 we learned that HHK Gagik Beglaryan, a former Transport Minister and Yerevan mayor, was placed on the wanted list and an arrest warrant in-absentia was issued.
At the time, he was charged with embezzling $483k worth property at the expense of a kindergarten. The investigation began after new mayor Hayk Marutyan busted 27 instances of kindergarten embezzlement by the former regime.
In another instance, Beglaryan's brother - a public official in charge of Sports Teams Center - gave property to his wife under suspicious circumstances.
His house was also raided as part of a fraud investigation involving North-South highway construction.
https://factor.am/277085.html https://armtimes.com/hy/article/181189 https://www.reddit.com/armenia/comments/foa22n/mar242020_whats_happening_in_armenia_papers/ Pashinyan's Kotayk trip / Roads and kindergartens / Magic wand / Արամուսի լավ գյազար կիլոն 2,000
Pashinyan: The first kindergarten in 40 years is being built in Aramus village.
Official: // After 2018, they began enforcing tax laws and restaurants began paying taxis. That money is what's paying for this kindergarten.
(magic wand) With population 4,000, Aramus will have a new gas network on several streets. By the end of 2020, the entire village will have gas. \\
Lots of lands are still left unused, however. The village is popular with carrot production.
There is even a popular song dedicated to Aramus's carrot. Locals asked Pashinyan to rebuild the road connecting to the neighboring village. "It hasn't been renovated since 1965."
PM visited a new greenhouse business. The CEO said they need qualified experts who could earn high salaries.
"You don't have to become a lawyer or economist to make a good living. Climate engineers, agricultural and vegetation experts are a hot commodity." "You have to learn English/Russian even if you do agriculture, though. You'll make a good living if you're a good expert in your field." https://youtu.be/mAGN1BP5XAE https://factor.am/277134.html https://youtu.be/2Ad3W_IPmyw?t=83 https://factor.am/277159.html https://factor.am/277168.html Court finds two policemen guilty of embezzlement
On Oct-2018, two cops and their secretary in Ararat were charged with stealing $57k worth funds from their colleagues' salary bonus budget, plus some tax evasion.
Today the court made a guilty verdict.
https://armenpress.am/arm/news/1025289.html Policeman rejects a bribe and busts a driver's license buying attempt
The report says: a few months ago, an 18yo man failed his behind the wheel test. He scheduled the second exam but failed again, so he used his friend's help to bribe the policeman in charge of licensing.
The policeman refused the bribe and pressed 3 counts of felony bribery charges. The suspects are told not to leave the country.
https://factor.am/277219.html Massive property corruption ring is busted / ex-Minister
The report says: several officials stole $2.8m between 2008-2014.
A company wanted to buy a property belonging to Urban Development Ministry. The Minister and other officials organized an illegal process to sell the property for half the price, causing $1.3m in damages.
Similar property transactions were made for the Minister's family members.
The SIS has launched a felony investigation.
https://factor.am/277243.html Tushonka's assets will remain frozen
The court denied a petition by disgraced general Manvel Grigoryan to remove the arrest on his assets. He was charged with various financial crimes.
http://www.panarmenian.net/arm/news/284156/ BHK chief Tsarukyan's casino hasn't paid the fees
Shangri La casino, the largest in Armenia, didn't pay the licensing fees for 3 months, totaling $2.8m, citing COVID-related issues. The IRS wants the money.
When asked about why they renewed their license despite knowing they wouldn't have clients, the casino said "we wanted to remain open and continue to pay employee salaries."
The IRS had earlier invited them to discuss the issue but they didn't show up. They claimed that not enough time was given for preparations.
https://www.1lurer.am/hy/2020/08/17/ՊԵԿ-ը-1-4-միլիարդ-դրամ-է-պահանջում-Գագիկ-Ծառուկյանի-ընտանիքին-պատկանող-«Օնիրա-քլաբից»/295749 Amulsar & Lydian / Laboratory resumes
Lydian miner: // we're reopening the analytical chemistry lab in Gorayq village which was operating since 2007. It was earlier shut down after illegal activities by environmental activists.
Local youth will be able to learn and work with science.
Armenia will have its first-ever "internationally certified technology of passive treatment for acid rock drainage." (Google Translate) \\
Activists gathered in the gated park in front of Parliament building to show support for Amulsar's preservation. The police notified them and the journalists that this area requires a permit for such "protests", and asked them to return after getting one.
Activists from Jermuk will soon hold a car rally to Yerevan.
https://factor.am/277171.html ,
https://youtu.be/oN7Wi2XJZC4?t=2121 ,
https://youtu.be/N0uYHWjfSlA Հերթը հասավ Սոթքին
A group of 200 Geghamasar residents shut down a highway to protest the activities of nearby Sotq mine. They complain that the recent explosions created a cloud of toxic dust.
The mine's representatives agreed to meet the protesters. The highway was opened.
https://factor.am/277132.html ,
https://factor.am/277206.html Civil society groups discuss election reforms / Ineligible voters inflating electoral numbers
NGOs held a meeting: The govt has SECT system that contains information about whether the person is located in Armenia. Since SECT was implemented in certain checkpoints with delays, it doesn't have accurate info about people who left/entered.
Another problem for SECT is caused when the person changes their last name abroad, for example after marriage.
If "Sasun" moves to Russia and writes his name as "Sergey", it'll case a problem.
One way to fix the problem with ineligible voters being on voter lists, as it's done in Georgia, is to require a valid ID to keep the person on the list.
These days, expired passports are not accepted for any transaction except for voting. This exception should be removed.
This will remove 188,000 people from voter lists.
Inflated numbers cause various problems. It makes it harder to gather enough % votes to add an issue to a ballot.
We also need to make sure people are registered to vote in districts where they actually live. This is especially important for provincial elections because local officials have a record of collecting residents from elsewhere to vote in another location.
Many people don't want to register their real address as their voting address because they want to hide the fact that they own the new address they live in (tax purposes?).
We must make it clear to the public that these electoral changes have no legal effect on their property ownership issues.
Full 2.5 hour video:
https://factor.am/277091.html https://youtu.be/B0ywmPt0ArM Tags: ##ElectoralReform #Elections #VoterList
Tavush village Aygepar...
.... is being rebuilt after being bombed by Azerbaijan during Tavush Battles. New roofs were installed on several houses.
Photos:
https://factor.am/277077.html Bordering villages to have Smart Barns
Moo. Thirty-four high-tech barns will be built in Gegharquniq's and Vayots Dzor's bordering regions, co-funded by Economy Ministry and the UN.
Up to 70% of the barn's cost can be subsidized. Must have a valid passport and a two-week veterinary training.
http://www.panarmenian.net/arm/news/284154/ ex-Defense Minister becomes Pashinyan's chief adviser
Vagharshak Harutyunyan was a Lt. General. He was critical of the Kocharyan administration and allegedly played a role against Kocharyan's plans to give a "corridor" to Azerbaijan in Armenia's southern Meghri province.
He was fired by Kocharyan and had his military rank stripped in 2002. He described it as "political persecution".
In 2019, Pashinyan restored his military rank after finding Kocharyan's decision illegal.
Today he was appointed as Pashinyan's adviser.
https://factor.am/277300.html https://www.azatutyun.am/a/30126601.html https://www.azatutyun.am/a/1569941.html After Pashinyan gets grilled by BBC's HARDTalk, Ilham Aliyev next?
HARDTalk invited Pashinyan for confrontational-style Q&A. The show also invited Ilham Aliyev. Will he accept the challenge, too?
An expert is skeptical that Aliyev himself will agree.
"The former MFA Mammedyarov was experienced and might have agreed, but the new MFA isn't. They won't risk it." https://www.panorama.am/en/news/2020/08/18/Ilham-Aliyev-will-not-risk-to-participate-in-BBC%E2%80%99s-HARDtalk-Elibekova/2345519 COVID stats
+145 infected. +8 deaths. 186,661 tested. 5,787 active. 300 serious/critical.
https://factor.am/277093.html Unemployment during COVID
230,000 unemployed and 1mln employed, said economist Hrant Margaryan. "This year's positive migration balance was a result of borders being closed."
http://arka.am/en/news/society/230_000_unemployed_in_armenia_now_expert_/ COVID testing in airport
Tourism-Armenia Association signed a deal with a COVID testing laboratory to conduct 6-hour tests for tourists visiting Zvartnots airport.
The visitors will get a 50% discount and will receive the results on email. If it's negative, they'll be allowed to exit the quarantine instead of waiting 14 days.
https://armenpress.am/arm/news/1025282.html COVID restrictions will be relaxed
Universities will also resume in September. Libraries, museums, theaters can operate under open-air.
TV anchors don't have to wear a mask if they're alone in the room.
Restaurants can perform live music under the open air. The max number of patrons near a table increases from 5 to 8.
https://factor.am/277222.html Japan issued a $2m grant to Armenia...
....to fight against COVID through equipment purchases.
https://armenpress.am/arm/news/1025286.html This 6-year-old kid cooks better than you. Admit it.
Mom found out about an upcoming cooking competition in Goris and registered his 6-year-old son Mher Harutyunyan. He became the youngest participant.
The kid prepared a stuffed fish with a salad and was declared the winner. He won a trip to a cooking show.
"Mher has been helping grandpa and mom in kitchen since the age of 3. His dream is to open a restaurant."
https://armenpress.am/arm/news/1025247.html Pashinyan's youngest daughter Arpi was baptized
Video:
https://www.facebook.com/nikol.pashinyan/videos/222906089113674/ Internal tourism during the pandemic
With the airports "closed", more people choose hiking and nature adventure, says the Tourism Committee.
Armenia has 11 companies that organize hiking to mountains. They gather 1,000 people every weekend.
Lately, there has been a great interest in rafting and canyoning. The youth also prefers horse riding and biking.
Off-road car travel among a small group is also common. They install tents to take a rest.
High-end hotels are already full for the next month.
https://armenpress.am/arm/news/1025214.html A herd of bezoar goats was captured by nature camera
Capra aegagrus live in rocky areas with bushes.
https://youtu.be/ZJnTCoSQ2bM Belarus: April 2018 or March 2008? / Lukashenko strikes a desperate tone
Context here. During a speech to his "loyal" factory supporters, people began chanting "leave" at Lukashenko:
https://t.me/nexta_tv/3817 He finished the speech with "Thanks. I've said everything. You can keep shouting LEAVE now."
https://youtu.be/2wZb_Y357to&t=19 A protester then shouted, "Shoot yourself, officer". Lukashenko approached the man to confront him:
https://www.youtube.com/watch?v=edcKH0ksAgs He gave another speech during which he warned the public that unfriendly NATO troops are only 15 minutes away from the borders:
https://youtu.be/R5Ssn2E1J8E?&t=309 The desperate man thanked his supporters for gathering in the square for a show of support.
"We built this country together. Who do you wanna give it to? Think hard, Belorussians. What is wrong with you? You've wanted to be called "people" for centuries. End me now, and it'll be the beginning of the end of yours."
https://youtu.be/QvCgC_Ub1Ac?&t=73 Aerial view of the size of the protests in Minsk. Half a million marched across the country:
https://youtu.be/f4W7wC2po9M https://youtu.be/rUxPk_1MdtI?&t=220 What angered the public the most was the brutality by the special forces and executions of protesters. Local administrators were confronted and scolded by the angry crowd, who demanded the release of the detained activists.
https://youtu.be/XjZn91kZZEY Doctors went on strike because they weren't allowed to enter jails to treat the thousands of detainees. There are widespread reports of torture. Medics chanted "resign" and "tribunal".
https://youtu.be/ODf4JlGD4RY Journalists noticed a fleet of trucks coming from Russia. They said the trucks look similar to Russian National Guard trucks that often appear during protests in Russia.
https://youtu.be/yGx-DvXx3wU Lukashenko rewarded 300 riot cops for their loyalty.
https://www.azatutyun.am/a/30789869.html You've read 1940 words.
Disclaimer & Terminology
1) The accused are innocent until proven guilty in the court of law, even if they sound guilty.
2) Currency in Armenian ֏ unless specified otherwise.
3) NSS/SIS/SOC = law enforcement agencies. QP = Civil Contract Party. LHK = Bright Armenia Party. BHK = Prosperous Armenia Party. HHK = Republican Party. ARF = Armenian Revolutionary Federation Party
4) ARCHIVE of older posts by Idontknowmuch: PART 1 ; PART 2 ; PART 3 ; PART 4 ; PART 5.
5) ARCHIVE of older posts by Armeniapedia.
Founders: Should you let early employees work for equity instead of cash?
Employees: Is a hot startup offering you equity instead of cash for your work?
This post explores the issues around providing or accepting work for equity in advance of seed funding. It highlights the substantial risks, potential problems and outlines common structures. It is in three sections: Founders, Employees and Deal Structure. Paying vendors or service providers with equity is discussed in the last section.
Edit: Thanks for the gold! Is that gold in equity or cash? :-) FOUNDERS When starting a company, cash can be scarce and good people can be expensive. If skilled people are willing to work for you for only equity, congratulations! That's a rare and huge vote of confidence. However, even if they are willing, should you accept labor for equity-only payment? The answer is "it depends."
Upsides - There's no surer sign someone believes in your vision than to bet they can help you turn it into reality.
- It lets you conserve scarce capital for necessities like product creation and marketing when it matters most.
- People working for equity may be more committed to making the business succeed.
- It can be an effective proof point to potential investors.
Downsides - Convincing talented people to sign on for no cash and keeping them (and families) convinced can be time consuming.
- Structuring no-cash equity comp deals can be complex.
- There are substantial legal risks.
- It's stressful on them and you. They may question business decisions you make and feel like co-founders.
- Are the people willing to work for equity-only the best people? You need great people and great people have cash job offers.
- If you can't pay them by the time they've exhausted their personal funds, they'll have no choice but to leave, disrupting the startup.
- Ethical concerns: If the company fails it could leave a good person who trusted you in dire financial straits. It's one thing if you go down with the ship but can your karma handle taking someone with kids down with you?
As a serial entrepreneur, I've done equity comp deals more than once. My macro advice to founders is to avoid doing it if you possibly can. The risks and distractions are substantial. However, sometimes there's simply no other way forward for the business. In that case, do it for the shortest time possible, do it right and do it
very carefully. Here's your basic decision tree:
- Can you avoid it? Is this person absolutely essential such that the business cannot move forward at all without their full time efforts? You should never consider an equity-only comp deal for anyone that is doing things you could do yourself sort-of-nearly as well. This is not something you do for an office manager or CFO. By definition, when you start paying salaries, this person is going to be one of your highest paid people, because their skills are so valuable.
- Is this person able to do it? You need to figure out if this person is really able to afford gambling and losing their paycheck. Conversely, are they just doing it because they don't have any other paying job prospects at the moment? If so, it's highly unlikely this person's skills are unique and valuable enough to consider doing this.
- Do you have momentum and serious prospects for funding? I'm not talking about the typical "We're gonna be bigger than Facebook!" bravado we put on for everyone else. I'm talking about that quiet conversation you have with yourself when deciding to risk the deed to your house on the success of your company. In that long, dark tea-time of the soul, do you really have serious prospects or is this still a dream riding on a wing and a prayer? If you don't have solid momentum yet, it's better to wait. The amount of time you can sustain a deal like this is limited. If you start too soon, it'll blow up before you're able to convert to salary and that could interrupt your dream just as it's becoming reality.
- Can you do a partial? It's much better to do a blended approach. Here's how I've done it. Pay the person a flat monthly fee as a 1099 contractor and accrue equity for the rest. In one example, I paid a super-star developer $2,000 a month as a contractor and the rest in equity. Based on discussions with him, I knew this was just enough for him to make his house payment and cover groceries, so he wasn't eating substantially into his savings. This was important because closing funding on favorable terms took longer than expected. If he'd been burning his savings I would have been forced to take funding on less favorable terms and that would have been bad for both of us. Was it fun to write that $2,000 check every month out of my personal savings account? No, but this was the best way to do it. When I sold the company, the equity he earned as a contractor before being hired was worth around a quarter of a million dollars (not including the equity he later earned as an employee).
Risks The legal risks are substantial, especially if it's an all-equity, no-cash deal. If your startup doesn't pay for the work, it's possible you don't own the intellectual property. That could include software code, website graphics, customer lists or pretty much anything else. Even if you are "paying" substantial equity on paper, the reality is the equity is worth zero until it's not.
No matter what kind of contract the parties sign, there is a risk you may not own the IP unless some vaguely reasonable amount of cash changes hands. This contractor could later make a claim against you and your startup. Am I a lawyer? Nope. But good lawyers worry about this scenario. I've had smart Sand Hill Road VCs turn pale on discovering this kind of deal on the books during due diligence - even though we'd long since started paying salaries. Like a scarlet letter, the potential liability never fades and never goes away. It'll remain an outstanding risk for the life of your company.
At the bright and bold beginning of your brave new adventure you're all comrades in arms, but over time things can change. Especially if your venture starts to become the success you've dreamed it can be. When that first glowing article about your startup hits the national media everyone who ever did a favor for you starts coming out of the woodwork. Most of them will go away empty handed. However, anyone you did this kind of deal with has some legitimacy to their claim. Is it a rock solid claim? No. But it's real and it's not nothing. When you do this kind of all-equity, no-cash comp deal, you are handing a loaded gun to every person you do the deal with. They are your best friend today and maybe they'll be your best friend forever but someday you may wake up to find that gun pointed at your head. Curiously, it's usually about the day after a bunch of extra zeroes appear in your bank account balance. Ask Mark Zuckerberg how costly it can be dealing with the ghosts of messy little deals made back when it was all fun and games.
Are you nervous yet? Good. Now go back to step 1 above and see if you can figure out a way not to need to do this. If you can't then whisper a prayer, hold your breath and proceed to Deal Structure below.
EMPLOYEES Is that hot startup that looks to be the next Pinterest or Snapchat short on cash? Is it looking like an opportunity to get in on the ground floor and score some extra bonus stock options by working for free until they close funding and can afford to pay you? If you are presented with this option, is it a smart thing to do? The answer is "it depends".
Upsides - If this startup becomes a huge deal, those stock options could be worth millions.
- You'll be in on the ground floor, about the closest thing to a co-founder there is.
- The boundless gratitude of the founder(s) for helping them out when no one else would may result in an awesome career path.
Downsides - You could get nothing for all your hard work. In fact, statistically, that is the overwhelming probability.
- You could end up looking like a fool. At every family gathering for the rest of your life, your mother-in-law will taunt you about the hours you slaved away for that Nigerian prince of a startup.
- Due to your emotional and financial commitment to the startup, you could continue burning your savings into the red zone because you'll keep believing it'll be funded "in just one more month." Kind of like that Nigerian prince.
- You're taking all the risks of a co-founder but getting rewarded like an "employee++"
- These kinds of deals are complex. You should probably get your own lawyer to look over the agreement and experienced lawyers aren't cheap.
My advice to prospective employees is to be incredibly paranoid and overly cautious when considering any arrangement like this. Never, ever bet money you can't afford to lose. All startups are substantially riskier bets than any casino game in Las Vegas. Even if the company is one of the few to become profitable, it doesn't mean that the startup's stock options will ever be sellable in a private or public transaction.
Although the startup may refer to you as an employee. Until you are receiving a cash salary greater than minimum wage, you
are not an employee. You are an independent contractor. They can't list you as an employee with the state until they are actually paying you cash and they can't do withholding, FICA and social security deductions as a percentage of zero. It doesn't work that way. Until you are employed you do not get benefits of any kind. The company's health and liability insurance do not cover you. You are not eligible for severance or unemployment benefits. The company is not obligated to reimburse you for any expenses unless agreed in advance.
Are you nervous? Good. You probably shouldn't do this. You will likely regret doing this. If you are still determined to do this, proceed to Deal Structure below.
DEAL STRUCTURE There are generally two parts to these types of deals and you should negotiate them as separate agreements. The first is the future job offer and the second is the contractor's work-for-equity arrangement which can be thought of as an investment in the company.
The Job Offer Typically, the trigger event for cash salaried employment is the startup closing funding. On that glorious day, how much will the job pay and what will the benefits be? Negotiate the terms of the job offer first, unrelated to the prior equity contractor work. There are many external references for employee salary+equity compensation including salary sites like Glassdoor as well as current job listings for the area.
When the startup is funded and the employee's cash salary begins, the prior contractor-work-for-equity arrangement stops. That future day will be the employee's official "Start Date" with the company. Prior to that they are an independent contractor.
On that future start date as an official employee, part of the overall comp package will include things like health care, vacation days and participation in the ESOP (employee stock option program). Negotiate this now, and do so unrelated to any prior equity-comp arrangement. It should just be fair equity comp for a regular employee hired on that date for cash salary post-funding. Depending on the employee's skills and the company's needs, that can range from sub 1% to several percent and will typically include some kind of cliff and vesting schedule. This should simply be the same deal the startup would offer an equally skilled employee who walked in post-funding and accepted a regular job.
The employee's participation in the ESOP will start on their "Start Date", not before. From that actual start date the ESOP equity will begin vesting under the standard vesting program. Once the parties have agreed on the terms of the future job offer, an important piece of information is now known: the employee/contractor's monthly value to the startup. For convenience, let's say you've all agreed the future cash salary will be $90k/yr gross plus some equity options. That works out to $7500/mo.
The Equity-for-Work Contractor Any equity deal to compensate the contractor needs to be based on the actual amount of time worked not a flat percentage like 1%. It should be a percentage rate that accrues per month that the contractor does non-salaried work and pro-rated down to the working day.
Let's say, for example, the contractor's work is valued at $7500/mo. The contractor could just take a lump payment in cash on their employee start date for the contractor work done up to that point at a rate of $7500/mo. That would be structuring the deal as a loan to the company. The problem is it's an unsecured loan on a high risk venture. The risk the contractor will do good work and never receive value for it are substantial. So, just like VCs and hedge funds, any increased risk should be compensated with increased upside.
Today, no one knows the value of this new venture but on the day the first external funding closes (not friends & family), smart investors will have estimated the value of the venture and the founders will have agreed this is the value of the venture. For example, let's imagine that 10 months from now the startup raises $1M at a post-money valuation of $4M. That means the day before they closed funding, 100% of the company was worth $3M. As a starting point, we would take $75k (10 x $7.5k/mo) and divide it into the $3M valuation. Obviously, the contractor should get substantially more than that amount of equity just for the ten months of work, otherwise he'd have been working for less than his subsequent employee salary. This risk premium is often a percentage increase similar to what is done with a convertible note. Google "Convertible Note" for more information.
In essence the contractor is investing in the startup exactly like an angel or seed investor. It's just in the form of reinvesting for equity the cash he would have been paid. Because this contract portion of the equity earned is virtually the same as a seed investor, the parties may agree to make the contract portion of the equity options payable in preferred shares instead of common shares like the ESOP. This is an advantage for the contractor because in any liquidation, preferred shares have senior rights. For example in a bankruptcy the preferred shares would receive funding ahead of common shares from the ESOP.
Depending on the terms, this kind of deal can have various advantages and disadvantages for both the company and the contractor. The company can halt the contractor accruing equity at any time by hiring the contractor as an employee and starting his cash salary. They could also choose to not hire the contractor as an employee at all. This preserves all the company's options. It also ensures, if the contractor does ten months of work and the startup opts not to hire the contractor as an employee, he still receives the equity compensation agreed on for the contract work.
The two distinct phases of the deal should not be conflated (contractor and employee). Otherwise, the company could terminate the employee in the first year after paid employment starts (in the one year cliff period) and all the equity the employee earned while a contractor would be zeroed out too.
So What's it Worth? There are three components to the contractor part of the deal:
- The contractor's value to the company ($7.5k/mo in our example).
- The company's equity value, which is unknown until external funding closes ($3M in our example).
- The risk premium to be added on top of the deal.
The equity in a pre-revenue, pre-funding startup is valued at a steep discount to cash since the equity could worth be X% of zero. How much of a discount? There's no firm guide and precedent varies widely. It depends on both party's expectations of the future viability of the startup. The founder's track record will likely be a factor as well as any tangible product, investor and customer momentum. On the other side, market demand for the prospective contractor's unique skills can drive up their value and the risk premium they can command. A 2x premium is certainly not unheard of, meaning the contractor receives $2 in equity priced at the next funding for every $1 they gave up in salary.
Variations and Twists There are several variations to this kind of deal structure which the parties can consider. My preferred approach is to never do equity-only payments. It's just too risky for both parties. I advise startups, instead of setting up contractors, hire them as employees at minimum wage and accrue the difference between minimum wage and their full compensation as equity options. This has several benefits including avoiding potential issues with justifying independent contractor status as well as providing cash value for services and labor received.
There are other variations as well. Equity for no-cash contractor work should vest on funding because that agreement, or portion of the agreement, will be concluded on completion of the contract work. The contractor can negotiate to have their vesting start date for ESOP options backdated from their employee start date to their contractor start date. A cash payment of some accrued bonus at funding (the end of the contract) can be considered, which may reduce the amount of equity being accrued somewhat. Sometimes these equity comp deals are mixed with deferred compensation which is repaid as cash plus interest upon funding, or alternatively, as cash plus equity. Another twist would be to agree, in the event of bankruptcy, to convert any contractor equity options to back-wages owed. Wages owed are one of the first obligations paid in a bankruptcy, whereas stock options are generally paid last if any funds remain. Since the duration of the contract work is unknown at the outset, an interest rate paid in extra options can be accrued similar to a convertible note. I've seen such interest rates vary from half a percent a month to two percent a month (note: this is as a percentage of the contractor's equity, not the company's overall equity). In another variation, the company might have the option to repurchase the options at a premium for some time period after the funding, essentially using cash from the funding to retire the options.
What About Vendors and Service Providers? Some vendors or service providers may be willing to work for equity or part equity, part cash. In one of my startups, for the first two years, our law firm, accounting firm and landlord all took 100% equity and no cash for their services. The landlord supplied a completely furnished office and covered our phone, internet, utilities and janitorial - all for equity. This was not during "the bubble" and it was not in silicon valley, however it
was based on a substantial track record. In general, vendors willing to take equity are rare.
With vendors, the structure of the deal mirrors the contractor arrangement discussed above. When I sold that company, all these vendors did well from their equity and were quite pleased. However, I wish I had converted those agreements to cash payments sooner. Though I personally had the cash to pay vendors at the beginning, and certainly had the cash after we reached profitability, maintaining these equity payments seemed like a good trade-off to put more cash into growth. If you do pay vendors with equity, keep a ledger and make sure you update the price in the ledger to your current share price, so you're constantly aware how much is accruing. It can add up and surprise you. While they certainly earned it, I'll admit watching that much money go to those guys in the end was a little painful. I still get nice Christmas cards from all of them though. :-)
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