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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

#81

Post by 7Figures2Commas »

swampthing wrote: post #80
7Figures2Commas wrote: post #61

Earlier quoted context omitted.

> 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…

I'm sorry, but you are just plain wrong about legal costs. Ask any reputable startup attorney in Silicon Valley whether it is net-efficient to start off as a Delaware C-corporation or a California entity.

> Ask any reputable startup attorney in Silicon Valley...

By "reputable startup attorney in Silicon Valley" I assume you mean a partner at any of the brand name full-service law firms that bill associates out at $400-500/hour for cookie-cutter work (like Delaware incorporation). My SO is a Biglaw attorney so I know how the game works.

You can easily find highly-experienced solo attorneys, many of whom have Biglaw backgrounds, or small firms run by experienced attorneys, who offer their services at hourly rates below the rate an inexperienced second year associate at a Palo Alto Biglaw firm is billed out at.

So I'll suggest a different question: ask any honest attorney whether it's net-efficient to retain a Biglaw firm before an individual has a real business.

Re: Lecture 18: Legal and Accounting Basics for Startups

#82

Post by swampthing »

7Figures2Commas wrote: post #81
swampthing wrote: post #80

Earlier quoted context omitted.

I'm sorry, but you are just plain wrong about legal costs. Ask any reputable startup attorney in Silicon Valley whether it is net-efficient to start off as a Delaware C-corporation or a California entity.

> Ask any reputable startup attorney in Silicon Valley... By "reputable startup attorney in Silicon Valley" I assume you mean a partner at any of the brand name full-service law firms that bill associates out at $400-500/hour for cookie-cutter work (like Delaware incorporation). My SO is a Biglaw attorney so I know how the game works. You can easily find highly-experienced solo attorneys, many of whom have Biglaw bac…

Yea, because lawyers at biglaw firms are telling people to incorporate as a Delaware C-corporation just so they can rack up legal bills. Ha!

I don't know where your SO works, but most biglaw attorneys in Silicon Valley view formation work as a loss-leader. It's not where the money's at.

And you definitely don't need to have a biglaw lawyer to form a Delaware C-corporation.

Re: Lecture 18: Legal and Accounting Basics for Startups

#83

Post by 7Figures2Commas »

swampthing wrote: post #79
7Figures2Commas wrote: post #59

Earlier quoted context omitted.

> 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 "st…

1. No VC will not give you a term sheet - probably true (so long as you don't tell them about all the time / money you spent trying to optimize your legal structure for what they would consider to be the failure case). But there's this concept called "deal risk" - the longer it takes to get a deal done, the greater likelihood something will come up that blows it up. 2. Incorporating a Delaware C-corporation is by far…

> Incorporating a Delaware C-corporation is by far the simplest option for high-growth tech startups. As an attorney in Silicon Valley, I cringed every time I had to deal with some other type of entity because it just wasted a lot of time (and thus the client's money) figuring out stuff that is muscle memory for Delaware C-corporations.

No offense, but this says more about your experience than it does about California corporate law. When you have a hammer, everything is a nail. Just because you worked at a full-service law firm that primarily deals with companies incorporated in Delaware doesn't mean that your experience represents all attorneys.

Maintaining a California corporation is not rocket science. There are plenty of competent, experienced attorneys in California who have "muscle memory" when it comes to California law.

Re: Lecture 18: Legal and Accounting Basics for Startups

#84

Post by 7Figures2Commas »

swampthing wrote: post #82
7Figures2Commas wrote: post #81

Earlier quoted context omitted.

> Ask any reputable startup attorney in Silicon Valley... By "reputable startup attorney in Silicon Valley" I assume you mean a partner at any of the brand name full-service law firms that bill associates out at $400-500/hour for cookie-cutter work (like Delaware incorporation). My SO is a Biglaw attorney so I know how the game works. You can easily find highly-experienced solo attorneys, many of whom have Biglaw bac…

Yea, because lawyers at biglaw firms are telling people to incorporate as a Delaware C-corporation just so they can rack up legal bills. Ha! I don't know where your SO works, but most biglaw attorneys in Silicon Valley view formation work as a loss-leader. It's not where the money's at. And you definitely don't need to have a biglaw lawyer to form a Delaware C-corporation.

Yes, the incorporation is just the beginning of the cookie-cutter work that gets performed by associates who are billed out at exorbitant rates not justified by their level of experience.

I don't have anything against Biglaw. There is a place for the large full-service firms. But I can retain one at any time. At the earliest stages of a company, incorporating in Delaware "because VC" and retaining a Biglaw firm "because success" is just foolish for the average entrepreneur, especially young first-timers who have a high likelihood of failure. Entity selection is usually easily revisited, and you can get high-quality legal counsel at a fraction of the Biglaw cost.

Re: Lecture 18: Legal and Accounting Basics for Startups

#85

Post by swampthing »

7Figures2Commas wrote: post #83
swampthing wrote: post #79

Earlier quoted context omitted.

1. No VC will not give you a term sheet - probably true (so long as you don't tell them about all the time / money you spent trying to optimize your legal structure for what they would consider to be the failure case). But there's this concept called "deal risk" - the longer it takes to get a deal done, the greater likelihood something will come up that blows it up. 2. Incorporating a Delaware C-corporation is by far…

> Incorporating a Delaware C-corporation is by far the simplest option for high-growth tech startups. As an attorney in Silicon Valley, I cringed every time I had to deal with some other type of entity because it just wasted a lot of time (and thus the client's money) figuring out stuff that is muscle memory for Delaware C-corporations. No offense, but this says more about your experience than it does about Californi…

Let me put it to you this way - if you are building a high-growth tech company, you want lawyers who specialize in high-growth tech companies.

Since most high-growth tech companies, at least in the US, are Delaware C-corporations, the lawyers that specialize in those companies are going to be most familiar with Delaware C-corporations.

Do these lawyers have to be at large law firms? Nope, as you mentioned, there are plenty that are out on their own or are at smaller firms.

Re: Lecture 18: Legal and Accounting Basics for Startups

#86

Post by swampthing »

7Figures2Commas wrote: post #84
swampthing wrote: post #82

Earlier quoted context omitted.

Yea, because lawyers at biglaw firms are telling people to incorporate as a Delaware C-corporation just so they can rack up legal bills. Ha! I don't know where your SO works, but most biglaw attorneys in Silicon Valley view formation work as a loss-leader. It's not where the money's at. And you definitely don't need to have a biglaw lawyer to form a Delaware C-corporation.

Yes, the incorporation is just the beginning of the cookie-cutter work that gets performed by associates who are billed out at exorbitant rates not justified by their level of experience. I don't have anything against Biglaw. There is a place for the large full-service firms. But I can retain one at any time. At the earliest stages of a company, incorporating in Delaware "because VC" and retaining a Biglaw firm "beca…

I'm not sure where you got the idea that I'm arguing for getting a biglaw attorney?

Re: Lecture 18: Legal and Accounting Basics for Startups

#87

Post by danieltillett »

brackenbury wrote: post #71
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…

I agree with you when you say ideas are actually worth something. When investors say ideas are worth nothing, execution is everything that's very self-serving. The idea wasn't theirs, so of course they want you to believe the idea is worth nothing. Also, the suggestion that all co-founders should start with equal shares, regardless of how much work they put in and whose idea it was, this is also very self-serving. Th…

Everything in this series should be taken with a grain of salt [1]. If truth in advertising were required of course names then the title of this series would have been "How to Start a Start-up to maximise the return for SV VC".

1. I am not being critical of the content (well not most of it) as there was lots of valuble information, but the lack of anything other than one perspective of how you should start a start-up.

Re: Lecture 18: Legal and Accounting Basics for Startups

#88

Post by danieltillett »

chasb wrote: post #34
foreign-inc wrote: post #33

Earlier quoted context omitted.

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 pay corporate tax on profits. You're not going to have any recognizable, taxable profits if you're bootstrapping a company that will take VC at some point.

If you are bootstrapping then it is quite likely that you will make a profit [1]. The reason why is that you need to build up capital in the business to provide a buffer for anything going wrong or to take advantage of new opportunities. Trying to run a bootstrapped company on the knife edge of break even is not easy.

1. This is assuming that you have not been lent the capital required to the company.

Re: Lecture 18: Legal and Accounting Basics for Startups

#89

Post by 7Figures2Commas »

swampthing wrote: post #85
7Figures2Commas wrote: post #83

Earlier quoted context omitted.

> Incorporating a Delaware C-corporation is by far the simplest option for high-growth tech startups. As an attorney in Silicon Valley, I cringed every time I had to deal with some other type of entity because it just wasted a lot of time (and thus the client's money) figuring out stuff that is muscle memory for Delaware C-corporations. No offense, but this says more about your experience than it does about Californi…

Let me put it to you this way - if you are building a high-growth tech company, you want lawyers who specialize in high-growth tech companies. Since most high-growth tech companies, at least in the US, are Delaware C-corporations, the lawyers that specialize in those companies are going to be most familiar with Delaware C-corporations. Do these lawyers have to be at large law firms? Nope, as you mentioned, there are…

As I suggested above, the problem is that just about everybody in Silicon Valley is convinced they're starting a "high-growth" tech company, even when they have little more than an idea on a napkin.

The number of companies that actually achieve high growth and have high-growth company legal needs is small, as is the number of startups that raise institutional capital. Heck, lots of companies struggle and fail to raise any funding at all. Of those that raise seed funding from angels, the majority will not be able to secure a real Series A.

Structuring your entity and selecting an attorney on the assumption that you're starting a high-growth enterprise before you are anywhere close to having one is like spending all of your time and money trying to architect a web application that can support a billion users before you even have your first 100. It's premature optimization plain and simple.

On that point, I have never met an entrepreneur who failed because he or she didn't incorporate in Delaware or retain a "startup attorney" with a fancy office on Page Mill Road. I have met plenty of entrepreneurs who have failed in part because they took on certain expenses prematurely based on misguided assumptions and rosy projections.

Re: Lecture 18: Legal and Accounting Basics for Startups

#90

Post by rhc2104 »

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…

I should point out that $1.60 revenue/user/month is really high, unless you are addressing a marketable niche like engaged women.

Facebook has half that revenue per user, and that's with powerful targeting options and a userbase that spends a lot of time on the site/app.

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