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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

#61

Post by 7Figures2Commas »

jalonso510 wrote: post #41
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…

The decision about where to incorporate shouldn't just be about taxes - you're signing up for a body of corporate law and procedure and the differences can have a big impact. And CA vs DE is just night and day in terms of user-friendliness. Sure you could save a few hundred dollars in taxes by incorporating in CA, but you'll burn through those savings on the first day your corporate lawyer has to address one of the m…

> The decision about where to incorporate shouldn't just be about taxes - you're signing up for a body of corporate law and procedure and the differences can have a big impact. And CA vs DE is just night and day in terms of user-friendliness.

I never suggested the entity selection issue boiled down to taxes and taxes alone.

You seem to be under the impression that matters of corporate law are a lot simpler than they actually are. This article[1] explains why that's not always the case. Bottom line: incorporating a California-based business in Delaware doesn't necessarily allow you to avoid the California Corporations Code.

If you operate a startup based in California, the majority of which is owned by California residents, you are absolutely not going to see your legal costs reduced by incorporating your California-based business in Delaware.

[1] http://www.lexisnexis.com/legalnewsroom/corporate/b/business...

Re: Lecture 18: Legal and Accounting Basics for Startups

#62

Post by suchthrowaway »

TheBiv wrote: post #55
suchthrowaway wrote: post #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.…

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

At the end of the day, you really have to trust your cofounders. Betrayals happen but you can't found a company with people you don't trust.

A cliff still makes sense in cases when a cofounder abandons a start-up and stops working. Maybe the safest way for everyone involved is to only apply cliffs for the first 3 months or in the case of voluntary departure. That still leaves room for abuse but at least the temptation is more limited.

I'm sure the folks at YC have experience with just about every permutation of this scenario. I wish the video had also covered protecting the founders on the other side of a split up.

Re: Lecture 18: Legal and Accounting Basics for Startups

#63

Post by danieltillett »

suchthrowaway wrote: post #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.…

If you had worked without pay you should have been able to use that as leverage to get vested - this was one of the points made in the lecture of why you should always pay the founders.

Re: Lecture 18: Legal and Accounting Basics for Startups

#64

Post by anonymouse5 »

I have not watched this particular video yet, but I'm shocked at the amount of people that sound like they have not even gotten started on their idea and already thinking about 'tax havens'. What chance do we have of big corps paying taxes in the country they operate in if we're teaching people tax avoidance at the startup stage ?

Re: Lecture 18: Legal and Accounting Basics for Startups

#66

Post by Udo »

graycat wrote: 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…

> it's got to be a pretty good business before it qualifies for VC equity funding [...] has the business take an equity check and suddenly owns 0% of the business, to start to get back some ownership

The core value proposition of VC equity funding seems to me is enabling the business in the first place, or at least taking the business to places it could otherwise never reach. Obviously, there are lots of cases where that simply isn't necessary - and nobody likes to take on unnecessary equity holders if they don't need the money.

But if you do need the money, it's not a surprise this comes at a cost. People who invest in companies want to make sure those companies have a decent shot at succeeding. The vesting scheme is designed to incentivize founders to keep working on their company, and if that looks very similar to vesting schemes early employees get that's not an accident.

The same goes for your more general criticism of SV as a location. There are startups where this is simply not relevant. Nobody wants to move their life and business to another (more expensive) location if they don't expect it to be better there. But for a certain type of startup, the expectation that SV is better than any other part of the world is absolutely justified.

Everything is a tradeoff. It makes sense to evaluate these tradeoffs carefully. Money has a cost. Optimizing your opportunities (usually) has a cost. Sometimes you need investors to succeed, sometimes you don't.

To put it bluntly, if I can become the next Facebook while sitting in my garage in Vladivostok not talking to anybody, there is absolutely no reason to move to Silicon Valley and give away most of my company. That's a big if, though.

Re: Lecture 18: Legal and Accounting Basics for Startups

#68

Post by rpedela »

foreign-inc wrote: post #33
chasb wrote: post #32

Earlier quoted context omitted.

You are not likely to have any tax liability anyways, so it would be easier and probably cheaper to incorporate first. Reformation is a headache.

My understanding is that if you form a C Corp, then you have to pay corporation tax and then your personal income tax. With LLC you can avoid that. Probably not an issue if you are paying yourself the minimum salary.

You do have a minimum state tax regardless of revenue or profit, but corporate income tax is only on profit. Therefore double taxation does not matter until you are profitable. In addition, you can "carryover" losses from previous years to profitable years in order to reduce your tax burden. In other words, if you lose $10K in year one and have a profit of $10K in year two then you have $0 taxes in year two. The paperwork is complicated for "carryover" so please consult an accountant.

Re: Lecture 18: Legal and Accounting Basics for Startups

#69

Post by rpedela »

foreign-inc wrote: post #57
kapilkale wrote: post #47

Earlier quoted context omitted.

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 inte…

I think it is worth the money, if you can afford it, to just do it right from the beginning (Delaware C Corp). Significantly reduces stress. If you need to raise money, you can do it and there wont be any issue with your incorporation documents during due diligence. And sometimes fixing things later is more costly than just paying the ~$5K upfront.

Please do not use RocketLawyer or something similar. They are super cheap, but they only create a shell C Corp. I made that mistake which luckily wasn't costly to fix.

Re: Lecture 18: Legal and Accounting Basics for Startups

#70

Post by amorphid »

lunaru wrote: post #42
simantel wrote: post #26

Does anyone have a good resource for legal and accounting basics for single-founder lifestyle businesses?

It's always good to ask for help, but sometimes the help is useless unless you know the basics in order to have a strong intuition for the various account and legal tips you'll receive. Left field suggestion: Take a quarter of Business Law or Accounting 101 at a local college like De Anza (a junior college in the Bay Area). This can be more fun than reading articles online. When you finally do get a lawyer or account…

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