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