The video provides essential legal and financial advice for startup founders, including forming a Delaware corporation, equal equity allocation, vesting, fundraising, investor selection, payroll services, and insurance.

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  00:00

  Setting up a startup involves legal and accounting issues, forming a Delaware corporation is the easiest option, and using services like Clerke can help avoid high stress situations during fundraising.

  • Christie and Carolyn discuss the basic legal and accounting issues that startups may face, with the goal of helping founders set up their company in the right way and avoid pain.
  • Setting up a company involves protecting assets, raising money, hiring employees, entering into contracts, and discussing issues among founders such as leadership and equity.
  • Forming a corporation in Delaware is the easiest and most investor-friendly option due to clear and settled laws and investor comfort with Delaware corporations.
  • A company formed as an LLC in Connecticut was advised to convert to Delaware, but a crucial mistake made by the lawyers resulted in the company raising money as a Delaware corporation for a couple of years when it was still a Connecticut LLC, leading to a $500,000 bill for four different law firms.
  • To set up a Delaware corporation, fax two pieces of paper to Delaware and complete a set of documents that create a board of directors, officers, and approve the bylaws of the company.
  • When incorporating a company, use services like Clerke to set up standard basic documents and keep them in a safe place to avoid high stress situations during due diligence or fundraising.
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  08:08

  Equal equity allocation among founder teams is crucial for trust, alignment, and long-term success of startups.

  • Equity allocation is critical for founder teams, and while ideas are important, execution has greater value, so stock should be allocated equally among the founders.
  • Unequal ownership among founders can indicate a lack of trust and alignment, and it's important for all founders to be fully committed to the long-term success of the startup.
  • Equal equity allocation is important for the whole team's satisfaction and success, as seen in top YC companies where founders have not had significantly disproportionate equity splits.
  • When receiving shares as part of a compensation package, it is important to sign a stock purchase agreement to ensure a two-way transaction and clarify ownership of past contributions.
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  12:28

  Vesting is crucial for founders to ensure fair distribution of equity and commitment to their startup, with a standard four-year vesting period and one-year cliff in Silicon Valley.

  • It is crucial to sign the stock purchase agreements and 83-b election and have proof of sending it in to avoid deals blowing up, and vesting means getting full ownership of stock over a specific period of time.
  • The standard vesting period in Silicon Valley is four years with a one-year cliff, where the founder fully owns 25% of the shares after one year and the remaining shares vest monthly over the next three years.
  • If a founder quits before the right cliff period, they leave with zero shares, but if they quit after the right cliff period, the company can repurchase their shares at the same price per share that the founder paid.
  • Vesting is important for founders to prevent unfair distribution of equity and to incentivize them to stay committed to their startup, even for solo founders.
  • Founders should have vesting on their shares to align incentives and set the tone for the company culture.
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  17:56

  Startups can raise money through convertible notes or safes, with a set valuation cap, but be aware of future dilution and only accept investments from sophisticated and accredited investors.

  • The lecture discusses the two ways to raise money for a company, either with a set price or without, and the different rounds of funding that can occur.
  • Convertible notes or safes are a two-way transaction where investors pay money for the right to receive stock at a future date, with a set valuation cap, but no voting rights until the price is set by investors in a priced round.
  • Investors who invest early in a company with a lower valuation will receive more shares and a higher reward when the company's valuation increases in the future.
  • Be aware of future dilution when raising money, as early investors and those coming in at a priced round may end up owning a significant portion of the company.
  • Investors in startups should be sophisticated and accredited, as those who invest small amounts of money often cause problems for the company in the long run.
  • When raising money using standard documents, it's important to understand the terminology and potential future dilution.
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  24:51

  Be cautious when choosing investors, keep track of expenses, and invest in payroll services to avoid costly consequences.

  • Investors may request a board seat or advisor role, but startups should be cautious and choose wisely, as valuable advice is more important than just having money.
  • Pro-rata rights allow investors to maintain their percentage ownership in a company by buying more shares in the future, while information rights give investors contractual access to certain information about the company.
  • Knowing everything about your financing is important, and after raising money, it's crucial to keep track of business expenses which can be deducted on the company's tax return to lower taxes paid.
  • Investors trust you with their money to make the company a success, so it's important to keep track of business expenses and not spend the money frivolously.
  • Founders need to be paid as employees and should not let their company take on this liability, and companies have to pay payroll taxes.
  • Payroll service is worth investing in, as not doing so can lead to costly and disastrous consequences.
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  33:35

  Pay yourself and your co-founders, distinguish between employees and contractors, and hire carefully to avoid legal complications.

  • Founder breakups can get ugly when the fired founder hasn't been paid, as unpaid wages become leverage for the fired founder to get something they want from the company, typically vesting acceleration.
  • Pay yourself, pay payroll taxes, treat co-founder wages like a prenup, and hire employees carefully to avoid legal complications.
  • Distinguishing between employees and contractors is crucial for legal and financial reasons, as they have different document requirements, payment methods, and levels of autonomy.
  • Companies are responsible for withholding taxes for employees but not for independent contractors, who receive a form 1099 and are responsible for their own taxes, and founders need to pay themselves at least minimum wage.
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  38:26

  Startups need to prioritize workers compensation insurance, effective communication, and proper handling of employee terminations to succeed.

  • If you have employees, it's important to have workers compensation insurance and proof of their authorization to work in the US, and to use a payroll service provider like ZenPayroll to handle these tasks.
  • Firing employees is hard for founders, but it's necessary to do what's right for the company, and it's best to do it quickly.
  • Effective communication, immediate payment of wages and accrued vacation, cutting off access to digital systems, and repurchasing invested shares are key steps in handling employee terminations for startup founders.
  • To be a successful and professional company, keep it simple, organize equity ownership, understand financing documents, ensure payment and IP ownership, know key metrics, and follow the rules.
  • Founders should engage a bookkeeper to categorize expenses and a CPA to prepare annual tax returns for the company, with services like in DeNiro available to make the process easier.
  • Get recommendations from specialists in CPA, accounting, or law who are used to dealing with startups when incorporating and avoid spending money on big corporations by using online services like Clerke.
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  46:31

  Starting a business may not require a lawyer, but services like Clerke can help with basic documents to save on legal fees.

  • You may not need a lawyer when starting a business, but it depends on the complexity of the business, such as privacy policies and fundraising terms, and services like Clerke can help with basic documents to save on legal fees.
  • Banks struggle to deal with companies using cryptocurrencies due to lack of understanding and specific product issues.