I know stocks are traded to raise funds and help operate the business better, but can companies use the money to directly pay their employees? Or does all payroll come from revenue?
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Once a company sells shares as an IPO all subsequent stock trading is between investors, and doesn’t involve or benefit the company.
Usually when a company is in the startup phase, all payroll is covered by investors. First you have the angel/A series/B series investors, they provide a starting amount of money to develop the initial product. This covers payroll and operating expenses for the first few years.
Then there is the IPO and shares are sold to publicly to any investors who want them. Hopefully thing brings in a huge amount of money. This will continue to cover operating expenses and payroll until the product is profitable.
Once the product is profitable and the company exits start up phase, payroll is covered by revenue. However, the company will not have sold all the shares. Then will have held some back to give to employees. Employee compensation will be a combination of money + shares.
When people buy or sell stocks, the company sees none of that money. Its only when a company issues MORE stock, or buys the stock back does the company get/pay money.
Usually a company covers its payroll through revenue. Having said that, sometimes additional money comes through an additional investment: venture capital, additional rounds of funding etc. But again, those injections of cash are really changes in equity; we’re adding more owners, or increasing ownership stakes. If your company can’t fund its payroll through revenue at some point, eventually – once it can’t find additional investors willing to sink monkey into it – it will run out of money.
You can offer options and RSUs as compensation to employees..it doesn’t even matter if the company is publically traded.
There is no rules saying that you can not use money raised by issuing stocks for your payroll, in fact it is not that uncommon to issue stocks as part of a payroll. And for businesses which are in their startup phase and growing rapidly they have to spend the investors money on their payroll because growing takes a lot of employees but few paying customers. The logic behind this is that the work that is being done by the employees is assets that the company will make money from in the future. So spending investors money on the payroll will pay off as you will be able to pay dividends to the investors in a few years.
A company gets nothing from their stock being traded by other people.
The only way a company gains anything is if they are the ones selling stocks. Either by issuing new (dilluting previous stocks) or sell previously owned ones (usually gained through stock buybacks, where companies buy their own stock instead giving away money for dividends).
A company will also benefit in general by having a high market value (high stock price) in regards to getting better terms on loans since the market value can be used as collateral if the company cannot pay back the loan.
Both of these options can be used to fund salaries for employees.
Payroll comes from revenue, but if the company pays employees with stock options, that portion of pay is pretty effectively coming from shareholders (the percentage of the company they own is reduced by the shares granted when the options are exercised).
While there’s no restriction on where the money used to pay employees has to come, it only happens in certain situations, for instance when the company just started and doesn’t have the business cycle already established, or when a company buy another one that’s doing bad.
This is because your employees exist to help you do normal business, and this means that typical business operations should cover that cost. Imagine you have an employee to help you do your job, and every time you have to pay their salary you need a loan. Having an employee is not a charity, they do things because it’s convenient for the company, so unless you’re hoping that your activity grows and your employee’s work becomes self-paying, it’s not sustainable at the long term.
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