Startup Legal & Financial Basics with Kirsty Nathoo & Carolynn Levy | HtSaS 2014

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This article is a summary of a YouTube video "Legal and Accounting Basics for Startups with Kirsty Nathoo and Carolynn Levy (HtSaS 2014: 18)" by Y Combinator
TLDR 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.

Legal and Accounting Basics for Startups

  • 🏢
    Knowing the basics of legal and accounting issues can help startups set themselves up in the right way, avoid pain, and concentrate on making their company a success.
  • 💼
    The primary purpose of forming a separate legal entity for a startup is to protect founders from personal liability in case of a lawsuit.
  • 💼
    Forming a corporation in Delaware is the easiest and most common choice for startups, as the law is clear, settled, and investors are comfortable with it.
  • 💼
    Choosing the wrong legal structure for your startup can have serious consequences, as seen in the case of the company that mistakenly remained an LLC instead of converting to a Delaware corporation, resulting in a costly mistake.
  • 💡
    Ideas have zero value, it's the execution that creates real value in a startup.
  • 🤔
    Looking forward and being committed to the long haul is more important than past contributions or individual roles in a startup.
  • 💰
    "Thinking of your co-founders wages like a marital prenup" emphasizes the importance of setting clear expectations and agreements regarding compensation in a startup.

Importance of Vesting and Equity Allocation

  • 💰
    According to the top YC companies, equal equity allocation among founders is preferred for better team morale and execution.
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    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.
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    Vesting is important for founders because it ensures fairness and prevents a large chunk of equity ownership from leaving with a founder who decides to leave the company.
  • 💼
    Vesting aligns incentives among founders and sets the tone for the company, showing that everyone is committed for the long haul.
  • 💰
    Knowing key financial metrics such as cash position and burn rate is essential for startups to effectively communicate with investors and make informed decisions.

Fundraising and Investor Relations

  • 💰
    The two ways to raise money for a startup are either setting a fixed price for the investment or not setting a price, with the latter being more common in seed rounds.
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    Investors at the earliest and riskiest stage of a company's life often negotiate a valuation cap, which sets a limit on the conversion of their investment into shares.
  • 💼
    Adding an investor to your board should be carefully considered, as their value in terms of strategy and direction is priceless.
  • 💰
    Taking investor money and using it for personal expenses is stealing from the investors and can lead to serious consequences.

Q&A

  • Why is forming a corporation in Delaware recommended for startups?

    Forming a corporation in Delaware is recommended for startups because it has clear and settled laws, making it the easiest and most investor-friendly option.

  • Why is equal equity allocation important for founder teams?

    Equal equity allocation is important for founder teams because it indicates trust and alignment among the founders and ensures the whole team's satisfaction and success.

  • What is vesting and why is it important for founders?

    Vesting is the process of getting full ownership of stock over a specific period of time, and it is important for founders to prevent unfair distribution of equity and incentivize them to stay committed to their startup.

  • What are the two ways to raise money for a company?

    The two ways to raise money for a company are with a set price or without, and different rounds of funding can occur.

  • Why is it important to use a payroll service for startups?

    It is important to use a payroll service for startups because not doing so can lead to costly and disastrous consequences, such as legal complications and unpaid wages.

Timestamped Summary

  • 💼
    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.
  • 💰
    08:08
    Equal equity allocation among founder teams is crucial for trust, alignment, and long-term success of startups.
  • 💰
    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.
  • 💰
    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.
  • 💰
    24:51
    Be cautious when choosing investors, keep track of expenses, and invest in payroll services to avoid costly consequences.
  • 💰
    33:35
    Pay yourself and your co-founders, distinguish between employees and contractors, and hire carefully to avoid legal complications.
  • 💼
    38:26
    Startups need to prioritize workers compensation insurance, effective communication, and proper handling of employee terminations to succeed.
  • 💼
    46:31
    Starting a business may not require a lawyer, but services like Clerke can help with basic documents to save on legal fees.
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This article is a summary of a YouTube video "Legal and Accounting Basics for Startups with Kirsty Nathoo and Carolynn Levy (HtSaS 2014: 18)" by Y Combinator
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