Paid links are links on your blog or website for which you receive material compensation specifically for the purpose of hosting the link on your site. The reason this is important is that google and other search engines penalize websites and blogs that host paid links as well as the sites that pay for the links. Though this might seem unfair to a website that is trying to generate an income or for a site that is new and trying to get recognized, there is a good reason for this. Paid links, unlike other advertising and site revenue streams, affect search engines. These links are intended to boost page rank and when paid links are used it usually makes the search experience worse for users.
There are situations where you might have been given material benefit and google will not count it as material compensation, such as if you go to a conference and get swag like pens and t-shirt. Those small items usually won’t be enough to get someone to host a link, so that is not considered material compensation. If your company offers free software so that a customer or potential customers can evaluate the software, they love it and put a link to your software on their page that would also not fall under the material compensation rule. In this case the intent was not to get the link but to allow for the evaluation of some software and perhaps sell that software or other services that go with the software.
There are also cases where search engine users expect there to have been something given for free, this also is not considered material compensation. One example would be a makeup reviewer who receives makeup samples in order to review them. In this case the value of the makeup would be nominal and it is expected that the reviewer would provide a link if they decide to review the makeup. In this case sending the makeup sample does not guarantee a review or a link. You will also see this situation where a movie critic will receive a movie ticket for free and then later link to that movie in the review, regardless of if the movie is good or bad, again this is expected so Google does not consider this a paid link. In addition, purchasing services from paid web directories may or many not be considered as paid link because Google has to evaluate if the linked gained from that web directory is useful for the user and not for search engines.
So in the end some of the criteria that Google will evaluate in deciding if a link is paid or not is material compensation either in dollars or in something else of tangible value. They will look at the intent of any giveaway and if the intent wasn’t to get a link, this may not be considered a paid link. There are some cases where even though the intent wasn’t to get a link the value of the item, services, etc., is so great it will still be considered material compensation. Google will also consider if users expect a host of a blog or website to receive items or samples for free. There are some other considerations and Google follows the guidelines set by the FTC in helping them determine if a link is paid or organic.