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Lecture 18: Legal and Accounting Basics for Startups

startupclass.samaltman.com

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Re: Lecture 18: Legal and Accounting Basics for Startups

#11

Post by calcsam »

7Figures2Commas wrote: post #4

The first slide is ironic. "Keep it simple" by forming a Delaware corporation is advice constantly repeated in some circles and it's simply asinine. The simplest option for founders is to incorporate in the state in which they reside/plan to conduct business as they are going to have to file as a foreign entity in that state anyway. The retort is "But investors won't invest in my California LLC!" The first fact this…

Sure, if you're planning to run a lifestyle business do whatever you want.

But if you're not, consider when you have an interested potential investor who's mulling over your business model and asks offhandedly, "So you're a Delaware C-Corp, right?" and you answer with this.

Then he thinks: "if they didn't even get this right, what else have they missed?"

And you lose the deal.

Re: Lecture 18: Legal and Accounting Basics for Startups

#13

Post by TheBiv »

7Figures2Commas wrote: post #4

The first slide is ironic. "Keep it simple" by forming a Delaware corporation is advice constantly repeated in some circles and it's simply asinine. The simplest option for founders is to incorporate in the state in which they reside/plan to conduct business as they are going to have to file as a foreign entity in that state anyway. The retort is "But investors won't invest in my California LLC!" The first fact this…

>> ...by forming a Delaware corporation is advice constantly repeated in some circles and it's simply asinine.

Do you have a few sources to back up this claim?

Re: Lecture 18: Legal and Accounting Basics for Startups

#14

Post by swampthing »

7Figures2Commas wrote: post #4

The first slide is ironic. "Keep it simple" by forming a Delaware corporation is advice constantly repeated in some circles and it's simply asinine. The simplest option for founders is to incorporate in the state in which they reside/plan to conduct business as they are going to have to file as a foreign entity in that state anyway. The retort is "But investors won't invest in my California LLC!" The first fact this…

Entity conversion isn't going to be the most complicated or costly part, but it could actually be the most time-consuming depending on the state you're converting from and a bunch of other factors. I've seen it take months - you can imagine the founders weren't happy (wasn't CA though).

I think you need to consider the target audience of the presentation - it's for people who want to start high-growth tech companies that will raise venture capital. If that's your goal, then the simplest option by far is to incorporate as a Delaware C-corporation. On the other hand, if a larger goal for you is to save a few hundred bucks a year on the extra franchise tax, then yea - maybe you want to incorporate in your home state. But then you're not the intended audience for this presentation or the advice contained in it.

I'd also just point out that telling people to just incorporate in their state of residence is no less boilerplate advice than telling people to incorporate in Delaware :)

Re: Lecture 18: Legal and Accounting Basics for Startups

#15

Post by nols »

TheBiv wrote: post #12
cperciva wrote: post #3

Around 33 minutes in, "working for free is against the law". Is this just a case of requiring a peppercorn? If not, how do $1/year salaries work?

What is requiring a peppercorn? Google wasn't of much help

A peppercorn is a tiny payment to provide consideration between the two parties. In common law both sides of the contract need to benefit somehow, so you can't have one party work or sell something for free. A peppercorn is a dollar or a pound to satisfy the requirement that both sides benefit (however tiny). So you'll have people who want to work for free getting hired for a dollar, or people selling a house for a dollar to their cousin.

Re: Lecture 18: Legal and Accounting Basics for Startups

#16

Post by gamblor956 »

cperciva wrote: post #3

Around 33 minutes in, "working for free is against the law". Is this just a case of requiring a peppercorn? If not, how do $1/year salaries work?

No, it's a matter of labor law. An employee that does not own a "substantial" amount of the company they work for must be paid at least minimum weekly salary, which varies from state to state. In NY, the minimum salary is $600/week. In California, the minimum weekly salary is 2x the state minimum wage ($9/hour) for 40 hours/week, or $720.

"Substantial" in this context depends on the facts and circumstances. Generally, anything less than double-digit % ownership is not substantial enough, unless the company is worth well into the millions.

Re: Lecture 18: Legal and Accounting Basics for Startups

#17

Post by dllthomas »

gamblor956 wrote: post #16
cperciva wrote: post #3

Around 33 minutes in, "working for free is against the law". Is this just a case of requiring a peppercorn? If not, how do $1/year salaries work?

No, it's a matter of labor law. An employee that does not own a "substantial" amount of the company they work for must be paid at least minimum weekly salary, which varies from state to state. In NY, the minimum salary is $600/week. In California, the minimum weekly salary is 2x the state minimum wage ($9/hour) for 40 hours/week, or $720. "Substantial" in this context depends on the facts and circumstances. Generally…

With a few exceptions that probably aren't going to apply to a startup, like volunteering for a nonprofit.

Re: Lecture 18: Legal and Accounting Basics for Startups

#18

Post by gamblor956 »

lukasm wrote: post #9

Pretty good bang per minute ratio. If company is a Delaware company, does it mean I have to pay myself Delaware min-wage?

That sounds like a good question to ask a lawyer. Any advice you get on HN should only be used as talking points for that discussion.

Re: Lecture 18: Legal and Accounting Basics for Startups

#19

Post by sparky_z »

gamblor956 wrote: post #16
cperciva wrote: post #3

Around 33 minutes in, "working for free is against the law". Is this just a case of requiring a peppercorn? If not, how do $1/year salaries work?

No, it's a matter of labor law. An employee that does not own a "substantial" amount of the company they work for must be paid at least minimum weekly salary, which varies from state to state. In NY, the minimum salary is $600/week. In California, the minimum weekly salary is 2x the state minimum wage ($9/hour) for 40 hours/week, or $720. "Substantial" in this context depends on the facts and circumstances. Generally…

> In California, the minimum weekly salary is 2x the state minimum wage ($9/hour) for 40 hours/week, or $720.

As somebody who knows basically nothing about any of this, I found this statement confusing. Don't minimum wage employees break this rule by definition? So what subset of "employees" does the rule apply to?

Re: Lecture 18: Legal and Accounting Basics for Startups

#20

Post by cperciva »

TheBiv wrote: post #12
cperciva wrote: post #3

Around 33 minutes in, "working for free is against the law". Is this just a case of requiring a peppercorn? If not, how do $1/year salaries work?

What is requiring a peppercorn? Google wasn't of much help

A peppercorn is the dried fruit of the black pepper; it's what you grind up to produce ground black pepper.

Or in the legal sense, it's an item of token value.

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