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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

#51
post #48

Good lecture: Important content, well organized, clear. But, but, but: It looks like there is a kind of a bus or bandwagon , and after this lecture I'm thinking of either not getting on or just jumping off before going too far. Sure, YMMV. More generally, I'm concluding that for information technology start-ups, Silicon Valley equity funding is on a long walk on a short pier, about to go the way of the Dodo bird. E.g…

Great post and I agree with nearly everything you have said especially on the importance of the idea. Good ideas are rare and valuble. If you think an idea is nothing then you don't have a good idea.

Re: Lecture 18: Legal and Accounting Basics for Startups

#52

Can someone explain in more detail the valuation cap notion (video 20:00-22:00mmss)

I had a fairly long reply typed out but I read through it and realized that Mark Suster did it far more justice on his blog than I could in a HN comment:

http://www.bothsidesofthetable.com/2012/09/05/the-truth-abou...

> Convertible debt with no cap is stupid for investors. Convertible debt WITH a cap is stupid for founders.

> With a cap means that every person who wrote you a check assumed that they were going to pay the cap. So if I write you a $500,000 check into a convertible note with a $4.5 million cap I am assuming when I write the check that I will own 10% of your company. If I didn’t assume this I shouldn’t write the check because I have to get involved knowing that I might pay that price.

> But entrepreneurs – convertible notes have no MINIMUM! So you’re taking all of the pricing risk. This has worked very well in the 2009-2012 time frame because the tech market has boomed in this period. But many convertible-debt companies are starting to feel that pinch now. I’m starting to hear it more often. And then the market does slow down you’re going to hear an entire generation of convertible-debt companies moan.

Re: Lecture 18: Legal and Accounting Basics for Startups

#53
For the most part, my cofounders and I followed the advice in this video—with the one exception of founder salaries. To be honest I really regret the vesting cliff.

I worked without pay for 6 months. I had no indication anything was wrong. We raised a seed round were about to finally start paying ourselves the cofounders booted me. Suddenly they weren't happy with my performance, though days before they'd praised it. Worst of all one of them still hadn't quit his full-time job!

The vesting cliff protects those who stay from a founder leaving early, but it also creates the possibility of a founder getting strategically booted once the business is less risky and/or starts getting traction. To be perfectly honest after going through this, I'm not very inclined to do a founder vesting cliff again.

Re: Lecture 18: Legal and Accounting Basics for Startups

#54
post #27

Earlier quoted context omitted.

OK, but wouldn't founders have "substantial" ownership? Yet the implication was that even founders had to be paid minimum wage.

for what it's worth, at my last startup I paid myself zero salary (as CEO/founder with significant ownership) and neither lawyers nor accountants squawked.

In California at least, that's because you can sue the company for underpaying you (at least 2x minimum wage as stated above) but others cannot bring that suit on your behalf. I don't believe California has any sort of "significant ownership" bar. So yes, the $1/yr salaries are against the rules, but just don't sue your own company.

Re: Lecture 18: Legal and Accounting Basics for Startups

#55

For the most part, my cofounders and I followed the advice in this video—with the one exception of founder salaries. To be honest I really regret the vesting cliff. I worked without pay for 6 months. I had no indication anything was wrong. We raised a seed round were about to finally start paying ourselves the cofounders booted me. Suddenly they weren't happy with my performance, though days before they'd praised it.…

Very interesting. Considering your scenario, would you advise others to not have a cliff or have a X month cliff?

Re: Lecture 18: Legal and Accounting Basics for Startups

#56
post #35

I thought this was good, but I was a little disappointed that they didn't have time to get to the "equity for employees" part (I also don't know if this was covered in another video, as I've only been watching sporadically). Do people have thoughts about this? It seems to me that this area is generally somewhat opaque, with many people on either side being reluctant to discuss it honestly for various reasons (founder…

Doesn't answer everything but does give you some real world ranges to consider: http://codingvc.com/analyzing-angellist-job-postings-part-1-... (was posted to HN a few days ago I think).

Re: Lecture 18: Legal and Accounting Basics for Startups

#57

If you are bootstrapping, does it make sense to start as a Delware LLC to keep your tax liability at a minimum and then switch to Delware C Corp when you raise funding?

Disclaimer: I'm not a lawyer or accountant, and you really should consult one of them about your specific scenario. Short answer: it's complicated, but probably C Corp. For the reason that if there's any chance you're going to take angel investment or give stock to employees, you almost need a C Corp. In fact, the lack of a standard C Corp just creates complications with investors and employees that puts you at risk.…

Thanks for the detailed answer. "If you have an LLC and want to take investment, it is relatively straightforward to convert to a C Corp if its early enough in the company's lifespan." Do you mean company's lifespan or the cap table structure? I found this article http://www.nolo.com/legal-encyclopedia/converting-llc-corpor.... It seems to mention only that the conversion should happen before the investment.

My intent is to get our saas product out and start charging through our website. So, I was thinking that forming an LLC is the cheapest way to get there. Spending several thousand dollars to form a C-corp seems too much at this point. http://www.quora.com/How-much-does-it-cost-to-set-up-a-C-cor...

Re: Lecture 18: Legal and Accounting Basics for Startups

#58

For the most part, my cofounders and I followed the advice in this video—with the one exception of founder salaries. To be honest I really regret the vesting cliff. I worked without pay for 6 months. I had no indication anything was wrong. We raised a seed round were about to finally start paying ourselves the cofounders booted me. Suddenly they weren't happy with my performance, though days before they'd praised it.…

I agree... there's too much room to get screwed over royally with cofounder vesting cliffs. The equity stakes are so much higher founder, and the compensation is usually either mostly or entirely stock. That means that if there's a breakup, the founder who gets booted is completely screwed and lost a year of their life for nothing.

I wouldn't have a 1-year cliff for any below-market employees. I'd reserve 1-year cliffs for employees with market salaries that happen post-funding.

Re: Lecture 18: Legal and Accounting Basics for Startups

#59

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…

> 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.

Correction: it's for people who have been convinced (or are in the process of being convinced) that they're starting high-growth tech companies that will raise venture capital.

Just because you immerse yourself in Silicon Valley culture and create a "startup" does not mean you actually have a high-growth business, or that you're going to raise capital from institutional investors. The vast majority of "startups" never achieve high growth, and venture firms reject far more companies than they fund. If you have a great business worth funding, no institutional investor is going to walk because you may need to revisit entity selection.

> 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 :)

I didn't advise that founders incorporate in their state of residence. I stated that this is the simplest option. And it is. That doesn't mean there aren't situations in which the simplest option is not the best option, but if you're going to rule out the simplest option, you should understand why doing so makes sense.

Re: Lecture 18: Legal and Accounting Basics for Startups

#60

For the most part, my cofounders and I followed the advice in this video—with the one exception of founder salaries. To be honest I really regret the vesting cliff. I worked without pay for 6 months. I had no indication anything was wrong. We raised a seed round were about to finally start paying ourselves the cofounders booted me. Suddenly they weren't happy with my performance, though days before they'd praised it.…

It seems to be in these legal areas that people expose what's really important to them. Sadly sometimes that means finding out people you thought were friends are capable of toxic things, even when you have written agreements. It can be a tough thing to learn, but I'd bet you are better off for learning it.
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