"I just recently started a social media Website for people who share an interest in certain niche collectibles. I want people to contribute articles and other content to my Website, but right now I've spent all of my money on developing the Website and don't have any left over to pay people with.
"I am thinking about setting aside 20 percent of my company — I'm a limited liability company (LLC), by the way — and giving pieces of that to people who contribute articles or otherwise help me build this Website.
"I'm also planning to raise venture capital for my Website down the road when it starts generating interest from advertisers and strategic partners, such as the companies who manufacture these collectibles.
"What do you think is the right way to reward these people?"
This is a perennial problem for startup businesses of ANY kind, not just websites. When you're first starting out in business, cash is very expensive. You want to dole it out with an eyedropper. If someone is willing to work for something other than cash, it's tempting — very tempting — to give them a tiny sliver of your company.
But that's a temptation you should resist at all costs. When you're first starting out in business, cash is precious and stock is cheap. As the business grows, however, your stock value grows until it becomes more valuable than cash. Remember the secretaries at Microsoft Corp. who all became millionaires when the company went public? Here are some reasons not to give out stock to strangers:
—Once you give people a piece of your company, however tiny, they become your business partner for legal and tax purposes. You will have to send them IRS Form K-1 at the end of each calendar year showing what their little piece is worth and report them as partners on the IRS Form 1065 (the partnership tax return) your LLC will have to file each April 15.
—Giving people a piece of the pie doesn't guarantee they will continue to contribute to your business. You want to give people an incentive to contribute regularly over the long term, not just write a few articles and then sit back and wait for their reward.
—Once people own a piece of your company, the only way you can legally get rid of them is to repurchase their piece for a price they are willing to accept. If your company is growing very rapidly, they will be inclined not to sell out until their share becomes too expensive for you to buy back.
—Venture capitalists and other professional investors really, really don't like it when they are lots of little business partners running around who aren't making a daily contribution to your business's growth. They will tell you to get rid of them (i.e. buy them out) before they will consider making a serious investment.
—Even if a venture capitalist is willing to tolerate these spoiled, unproductive little brats you've created, remember that you've legally given away 20 percent of your company. That means if the venture capitalist wants 51 percent of your company (a not uncommon situation) in return for his investment, you now own only have 29 percent of the business you founded. That's still not bad for a fast-growing technology business, but it's a lot less than it should be for the 24/7/365 time you've invested in building it.
So how DO you compensate people without paying out precious cash or giving away too much of your company? Here are some suggestions:
—Don't make any offer of compensation at all. Instead, let them tell you what they want in return for contributing articles and other content to your website. People will often surprise you. Many will contribute content for nothing as long as they get authorship credit for it. Even if they ask for compensation, they probably will ask for much less than you are willing to pay — it's amazing to me how many people will value themselves far below their actual worth to avoid rejection.
—If that doesn't work, give them a founder's discount on products, services and subscriptions they buy from your website.
—If that doesn't work, give them an option to buy a small piece of your company at a future time if you are satisfied with their contribution. It doesn't have to be a fixed date — you can allow them to exercise their option "when our internal webpages featuring your content account for 5 percent or more of the total hits on our website." That way they will get their reward only if they become players on your site.
—Lastly, if you absolutely must give people a piece of your business to get them to contribute highly valuable content that will help you grow your business, be sure they sign an agreement giving you the absolute right to buy back their share for a small price within the next five years if they stop contributing content for a significant period of time, they contribute content to a competing website or you are required to pull their content off of your website for any reason.
Cliff Ennico ([email protected]) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our webpage at www.creators.com.