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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