General
C chrisy and carollyn and they're going
to talk about uh finance and legal
Mechanics for startups um this is
certainly not the most exciting of the
classes sorry but if you get this right
uh this is probably the class most so
thank you very much for coming and uh
yeah goe okay so like Sam said this
lecture is about the mechanics of
startup and kiry and I are going to be
talking about some of the basic legal
and accounting issues that your startup
May face in the very beginning um I was
watching Paul Graham's video and at one
point he says Founders don't need to
know the mechanics of starting a startup
I thought oh no that's exactly what Sam
titled this
lecture um but what PG actually says is
that Founders don't need to know the
mechanics in detail um because it's very
dangerous for Founders to get bogged
down in the details and that's exactly
right and Kirsty and I can't give you
details in 45 minutes anyway so our goal
here today is to um make sure that you
do know better than to form your startup
as a Florida
LLC so as Sam mentioned we were also
worrying that it's going to be pretty
boring for for you to listen to a an
accountant and a and a lawyer talking
about this um you know you've had some
really amazing Founders talking about
really interesting things but but like
Sam said you know this this is the kind
of stuff that if you know the Basics you
can get yourself set up in the right way
avoid pain stop worrying about it and
then concentrate on what you actually
want to do which is make your company a
success and so you know we refer to this
term startup all the time and probably
in the back of your head you kind of
know that by startup we mean there has
to be some legal entity and that's you
know some kind of separate legal
entity um we'll talk a little bit more
about how we actually set that up and
what that means to you and you also
probably know that a startup will have
assets IP inventions other things and
that the company needs to protect those
so we'll talk a little bit more about
that about how to raise money um hiring
employees and entering into
contracts so there's a few other things
that that you need to talk about whilst
you're setting up your company which
kind of fits out a few issues amongst
Founders things like who's going to be
in charge and how much Equity is
everybody going to own so those are
really good things to talk about
too oh we've lost our slides there we
go okay this is us Kirsty has the
calculator I have like the geriatric
glasses which is actually pretty
fair okay so the first thing we're going
to talk about is formation Christy
actually just mentioned that um your
startup is going to be a separate legal
entity um and the and you guys probably
already knew this but the primary
purpose for forming a separate legal
entity is to protect yourselves from
personal liability and what that means
is if your company ever gets sued um you
know it can't it's not your money in
your bank account that the that the
person could take it's the corporation
so that's why you form one so then the
question is where do you form one and
theoretically you have 50 choices um but
the easiest place is Delaware and I'm
sure you're all familiar with that as
well but um Delaware is in the business
of forming corporations um the law there
is very clear and very settled it's the
standard the other thing is that
investors are very comfortable with
Delaware they already invest uh in
companies that are Delaware Corporations
most of their Investments are probably
Delaware Corporations so if you are also
a Delaware Corporation then everything
just becomes much more simple right
there's less diligence for the investor
to do you don't have to have a
conversation about whether or not to
reincorporate your Washington company
into Delaware so there's a reason that
so many companies do it it's standard
it's familiar so I'll tell you a story
we had a company at YC uh about two
years ago that was originally formed uh
as an LLC in a state that I'll I'll say
Connecticut um the founders had some
lawyer friends there who said this is
the right way to do it and when they
came to YC we said you guys need to
convert to Delaware so uh the lawyers in
Connecticut did the conversion paperwork
and unfortunately they didn't do it
right they made a very simple mistake
but it was a very crucial mistake the
company was recently raising money like
a lot a lot of money and this mistake
was
uncovered that the basically the mistake
was this company thought it was a
Delaware Corporation for a couple years
but in fact it was still a Connecticut
LLC and I'll just say this four
different law firms were needed to
figure that one out two in Delaware one
in Connecticut one here in the silon
valley and the bill right now is at
$500,000 for a conversion mistake so so
what's the takeaway here pretty simple
uh keep it really simple and familiar
for yourself the reason we incorporate
all companies the same way at White
combinator is because it's easy so don't
get fancy just save yourself some time
and
money okay so once you've decided that
you're going to be a Delaware
Corporation how do you actually set that
up um and it requires a few different
steps but the first one is actually
really easy you literally just fax two
pieces of paper into Delaware saying
we're going to set up a corporation
um all that does though is create a
shell of a company it doesn't actually
do anything within the company so after
that you then need to complete a set of
documents that among other things um
approve the bylaws of the company it
creates a board of directors it creates
offices of the company Delaware requires
that somebody has the title of CEO
president and of
secretary so also at this point you need
to complete documents that assign any
inventions or any code or anything that
you as an individual create so that the
company actually owns that um and
remember at this point it's it's a
really good thing to think about you as
Founders have to think about things in
two different ways um you always have to
be thinking am I doing this as an
individual as me or am I doing this on
behalf of the company which is a
separate entity so you have to maintain
that split in your mind going through
all of this and we'll talk more about
where that comes in uh a little bit
later so there are services that can
help you get Incorporated of course you
can use a law firm um but there are also
other online services that help and the
one that we often use with a lot of the
YC companies is called clerky um
clerk.com and they are set up so that
all the standard basic documents are
used and they get you set up in a very
vanilla way so that you can just move on
and keep keep focusing on what you need
to
do so a note on paper work um you're
creating documents these are really
important documents that are going to
be setting what the company does and
what the company is so it's really
really important that you actually keep
these signed documents in a safe place
and it sounds so basic but we get so
many Founders coming to us saying oh I
don't know the these some documents and
they have no idea what they are or where
they are so really really make sure that
you keep them in a safe place and let's
be let's be honest this is not the
Glamorous part of running a startup you
know filing documents um but actually at
the Times where this is crucial are
going to be at really high stress times
in the startup's life it's likely to be
if the company's raising a big series a
round or if the company is being
acquired the company will have to go
through due diligence and there will be
lawyers asking for all this stuff and if
you don't have it and you don't know
where it is it's just making a really
stressful situation even more stressful
so really the you know the key thing
here is like we say keep it simple but
keep those documents in a safe place um
and keep it organized it'll make your
life so much
easier okay so now we're going to talk
um about equity and we're going to touch
on a couple different things um in this
section the first thing that we're going
to talk about is equity
allocation so um what am I talking about
here I'm talking about if your company's
stock is a pie you're talking about how
to divide the pie and you're talking
about this with your
co-founders why is this important um
well if you're a solo founder this
really isn't important but if you are a
team of two or more then this issue is
absolutely critical so the first thing
that you need to know is that execution
has greater value than the idea what do
I mean by that a lot of founder teams
give way too much credit and therefore a
lot of the company's Equity to the
person who came up with the the idea for
the company and ideas are obviously very
important but they have zero value who's
ever heard of a billion dollar payment
for just an idea so value is really
created when the whole founder team
works together to execute on an idea um
and so you need to resist the urge to
give a disproportionate amount of stock
to the founder Who is credited with
coming up for the idea for the
company uh the next thing you want to
think about is okay so how much stock or
should the stock be allocated equally
among the
founders and from our perspective the
simple answer is probably yes um our
Mantra at Y combinator is that um stock
allocation doesn't have to be exactly
equal but if it's very disproportionate
that's a huge red flag for
us we wonder what conversation is not
happening in among the founder team when
the ownership isn't equal for example is
one founder secretly thinking that this
whole startup thing is uh temporary is
one founder overinflating the work that
he or she has already done on the
company or overinflating his or her
education or prior experience do the
founders really trust each other and
have they been honest with each other
about their expectations for this
startup and for the future so when
ownership is disproportionate what we
worry about is that the founders are not
in sync with one
another thirdly um it's really important
to look forward in the startup not
backwards inste another way uh all all
the founders in it 100% are they all in
it for the long haul if the expectation
at your startup is that each founder is
in it 100% and you're all in it for the
long haul then everything that happened
before the formation of the company
shouldn't matter it doesn't matter who
thought of the idea it doesn't matter
who did the coding or who built the
Prototype or which one has an MBA it
will feel better to the whole team if
the allocation is equal because the
whole team is necessary for
execution so so here's the Takeaway on
this point in the top YC companies which
we call those you know with the highest
valuations there are zero instances
where the founders have had
significantly disproportionate Equity
split all right so you've had the
conversation about how to split the
equity but then what um again we talked
to many Founders who are actually
surprised that they have to do something
in order to own this stock um they think
about they think that talking about it
is is actually enough um and this again
it's another situation where you have to
think about you as an individual versus
you as a representative of the company
and if you if you equate this to a large
company you know if you if you worked at
Google and you were told as part of your
compensation package that you would be
receiving some shares you would expect
to sign something to get those shares
and if you didn't you'd be thinking ah
what's going on here well it's the same
thing with with a small company as
well so in this case case the paper the
the documents that you're signing is a
stock purchase agreement so you as an
individual buy the shares from the
company and in any situation if you're
buying something there's a two-way
transaction where you pay for something
and you get something in return um and
in this case you're getting shares in
return for either a cash payment or for
contributing IP or inventions or code to
the company so that the company actually
owns everything that you've done in in
the
past so we also refer to that stock
being restricted um because it vests
over time and we're going to cover that
next um in more detail but as a result
of the stock being restricted investing
there's one very very crucial piece of
paper that we talk about until we're
blue in the face to everybody because
there's actually no way to go back and
fix this and this is actually one of the
things
that because there's no there's no way
to fix this this has blown up deals in
the past we've we've seen companies
where because they haven't filed what's
called an 83b election um deals have
blown up and I'm not going to go into
detail about what that 83b election is
actually about but just leave it as it
affects your individual taxes and it
affects the company's taxes and so it
can have a big impact so you know here
we have the main the main things here
are sign the paperwork sign the r sign
the stock purchase agreement sign the
83b election and make sure that you
actually have proof that you've sent
that in because if you don't have the
proof it just goes into a black hole at
the IRS and investors and acquirers will
walk away from a deal if you can't prove
that okay so the next thing we're going
to talk about um is vesting and I
imagine that many of you are familiar
with what vesting is but just in case
really simply um vesting means that you
get full ownership of your stock over a
specific period of time so we're talking
about the stock that ciry just said you
bought your stock of your company and
you own it and you get to vote it but if
you leave before this vesting period is
over then the company can get some of
those unvested shares back so um and I'm
just going to just so you guys know uh
the other ways to refer to vesting
you'll hear um restricted stock that
means that that stock that's subject to
vesting the IRS speak for this is shares
that are subject to forfeiture so so a
little terminology there um okay so what
should a typical vesting period be in
Silicon Valley the so-called standard
vesting period is 4 years with a
one-year Cliff this means that after one
year the founder veston or fully owns
25% of the shares then the remaining
shares bestest monthly over the next 3
years so here's here's an example
founder buys stock on Christmas day
let's say and then quits the company on
the following Thanksgiving so before the
year is passed um in that case the
founder leaves with zero shares right
Cliff period hasn't been met um if the
founder though quits the day after the
next Christmas so a year and a day later
he or she is vested in exactly 25% of
the shares right in that case the
one-ear cliff has been
met so what happens to the shares when a
when a Founder stops working at the
company
um company can repurchase those shares
in the example I just gave where the
founder quit a year and a day after
purchasing the shares 75% of those
Shares are still invested and the
company will repurchase all that full
75% of those shares from the
founder how just writes the founder a
check that's how the founder bought it
right so it's the same price per share
that the founder paid and it's really
just giving the founder his or her money
back so then the question is why would
have vesting why would Founders do this
to themselves right because it's just
the founders they're they're doing this
on their own
shares um doing this to their own shares
so and probably the number one reason
why vesting is important uh has to do
with Founders leaving the company so
without say if you didn't have vesting
and a Founder leaves a huge chunk of the
equity ownership leaves with her him
with him or her and obviously that is
not fair to the founders left behind
and we're actually going to talk about
this a little bit more when we get to
the founder employment slide I'll go
into that in more detail but the other
reason to have vesting is the concept of
skin in the game the idea that Founders
need to be incentivized to keep working
on their startup if a Founder can walk
away with his or her full ownership at
any point in time then why would you
stay and grind away startups are hard so
um do single Founders need
besting they do and the reason is
because the skin in the game concept
applies to solo Founders as well and
investors really want to see all
founders even solo Founders incentivized
to stay at the company for a long time
and the other reason that single
Founders should put vesting on their
shares is to set an example for
employees because you can imagine it
would be you know inappropriate for a
Founder to tell an employee that he or
she has to have foure investing on his
or her shares but the founder doesn't
think that he or she needs any on their
own shares um it's really culture Point
um a Founder who has vesting on his or
her shares then sets the sets the tone
for the company saying we're all in it
for the long haul we all have vesting on
our shares we're doing this together so
what are the takeaways from here I would
say um vesting aligns incentives among
the founders if they all have to stick
it out and grow the company before any
of them get any of that company and then
number two investors don't want to put
money in a company where the founders
can quit whenever they feel like it and
still have a big Equity ownership stake
in that company
okay so moving on we've now got a
beautifully formed Corporation in
Delaware everybody's got their stock um
it's all the the plain vanilla standard
paperwork so so then what you know
probably the next stage of a company's
life is needing to raise some money um
so we're going to we're going to talk a
bit more about that and and you know we
know that you've already heard a lot
from investors and from Founders already
in in this set of classes um and they've
been talking much more around the
tactics and how to raise money but what
about the paperwork what about when
somebody actually agrees to invest then
what so first of all in terms of
Logistics in very simple terms there are
two ways to raise money so either the
price is set for what the the money that
comes in or the price isn't set and by
price we mean the valuation of the
company it's it's the same
things so rounds can actually be called
anything people can can name them
whatever they want but generally if you
hear the term seed round it would mean
that the price has not been set and
anything that's a series A or a series B
would be something where the price has
been
set so not setting the price is the more
straightforward fast route to getting
money and usually the way that this is
done is through convertible notes or
safes and again this is a two-way
transaction so there's a piece of paper
that says for example that an investor
is paying $100,000 now and in return has
the right to receive stock at a future
date when the price is set by investors
in a priced
round so it's important to note that at
the time the paperwork is set that
investor is not a
shareholder and therefore doesn't have
any voting rights on the company they
will have some other rights um which
Caroline is going to talk about
separately of course investors want
something in return for putting in money
at the earliest I.E riskiest stage of
the company's life and this is where the
concept of EV valuation cap comes in
which I'm sure many of you have heard
mentioned
before so usually the documents um for
an unpriced round set a cap for the
conversion into shares and that's not
the current valuation of the company um
It's actually an upper bound on the
valuation used in future to use uh used
in future to calculate how many shares
that investors is going to
get so for an example an investor that
invests $100,000 on a safe with a $5
million cap um then a year later the
company raises a priced round with a
valuation of let's say $20 million um
then the early investor would have a
much much lower price per share
about a quarter um and therefore their
$100,000 would buy them approximately
four times more shares than an investor
that was coming in and putting in
100,000 in that series a priced round so
that's where they get their their reward
for being in
early so again this is another situation
where you need to make sure you have the
sign documents um and you you know where
they are because different investors may
have different rights and so you need to
know what those things are and again
services like clerky can can help with
that they have very standard documents
that most of our YC companies use to
raise money
on a couple of other things to think
about when you are raising money um
hopefully you've got a really hot
company that's that's doing great and
it's really easy to raise money but you
should be aware that all these people
throwing money at you does have some
downsides um so the first thing is to
understand your future dilution so if
you raise let's say $2 million on safes
with a valuation cap of $6 million then
when those safes convert into Equity
those early investors are going to own
about 25% of the
company and that's going to be in
addition to the investors that are
coming in at that price round who may
want to own 20% of the company so you've
already at that point given away 45% of
the
company so is this really what you want
and you know the answer might be yes um
remember that some money on a low
valuation cap is infinitely better than
no money at all and if those are the
terms that you can get then then take
that money um but it's just something to
be aware of and to follow through the
whole process so that you can see where
this is going to lead you down the
road the other thing to bear in mind is
that the investors should be
sophisticated um and by that we mean
that they they have enough money to be
able to invest um and that they they
understand that investing in startups is
a risky business you know we we see so
many companies coming into us that say
oh yeah my my uncle put money in or my
neighbor put money in and they've put
in5 or $10,000 each and often those are
the investors that cause the most
problems going forward because they
don't understand how this is a long-term
game um and so you know they get to the
point where they're sitting thinking hm
I could actually do with that money back
because I need a new kitchen or you know
this this startup investing is not
actually as exciting as all the TV shows
and movies made it out to be so and
those those cause problems to the
company you know if they're they're
asking for their money back so just be
aware that that you should really be
getting money from people who are
sophisticated and know what they're
doing and the term that you'll hear that
that refers to these people are that
they are accredited
investors so really the main the main
points here is keep it simple raise your
money using standard documents um keep
make sure that you have people who
understand what they're getting into and
understand what you're getting into in
terms of future
dilution okay so uh you're raising money
you understand what you're selling
figured out the price you've got down
the logistics that ciry just described
um but what you may find is that you
don't understand some of the terms and
terminology that your investors are
using and this is okay but you have the
burden to go figure that stuff out um
don't assume that just because you've
agreed on the valuation or the price um
that all the other stuff doesn't matter
because it does matter and you need to
know how these terms are going to impact
your company in the long run why
combinator um C and I here found say all
the time I didn't know what that was I
didn't know what I was signing you know
I I didn't know I agreed to that so
really the burden is on you to figure
this figure this stuff out and we're
going to go over four common investor
requests so the first one is board seat
um some investors will ask for a seat on
your company's board of directors and
the investor usually wants to be a
director either because he or she really
wants to keep tabs on their money or
because he or she really thinks they can
help you run your business and you have
to be really careful about adding an
investor to your board in most cases you
want to say no otherwise make sure it's
a person who's really going to add value
having money is very valuable but
someone who really helps with strategy
and direction is priceless so Choose
Wisely the other thing is advisors there
are so many people who want to give
advice to startups and so few people who
actually give give good advice once an
investor has given your company money
that person should be a de facto adviser
but without any official title and more
importantly without the company having
to give anything extra in return for the
advice so here's an example um at y
commentator we've noticed that whenever
startup manages to Garner a celebrity
investor the celebrity almost always
asks to be an adviser we have a company
that provides on demand bodyguard
services and an NBA basketball player
invested asked to be an adviser and then
asked to be given shares of common stock
in exchange for the advisor
services and the services that this
person had in mind this investor had in
mind would be to introduce this company
around to all the other professional
basketball players who might want to use
an ond demand
bodyguard but this celebrity just made a
big investment um shouldn't he want to
help the company succeed anyway why does
he need something extra all investors
who can help should do so asking for
additional shares is just an investor
looking for a freebie
okay next we're going to talk about PRS
what are Prat rights some of you may
have heard of this before but very
simply it's the right to maintain your
percentage ownership in a company by
buying more shares in the company in the
future for rather rights are a a way to
avoid dilution and dilution in this
context means um owning less and less of
the company each time the company sells
more stock to other
investors so this is a really basic
example but say an early investor buys
shares of preferred stock and ends up
owning 3% of the company once the
financing has closed and the company
raises another round of financing and
the company will go to this investor who
negotiated and got Pro rights and say
hey we're raising more money so you're
welcomed to buy you know this many
shares in the new round to keep your
ownership at approximately 3% that is
pro rights that they're very most
basic so PR wrs are very common requests
for from investors and they are not
necessarily bad thing but you absolutely
as a Founder need to know how Prat writs
work especially because Kirsty touched
on this a little bit the corollary to an
investor having Prat rights to avoid
dilution is that the founders typically
suffer greater
delution so the final thing is
information rights investors almost
always want contractual information
rights about to get certain information
about your company um giving periodic
information and status up updates is not
a bad thing in fact at YC we encourage
companies to give monthly updates to
their investors because it's a great
opportunity to ask for help for your
from your investors like um
introductions or help with hiring that
kind of thing but you have to be really
careful about overreach any investor
who's saying they want like a monthly
budget or a weekly
update that's not
okay so the takeaway here is that just
because the type of financing and the
valuation has been negotiated doesn't
mean that everything else is unimportant
you need to know everything about your
financing okay so then moving on to
after you've got that money um you know
you've raised some money the the company
bank accounts probably showing more
zeros in it than you've ever seen in
your life so so then what um this is
where you actually start incurring
business expenses and business expenses
are the cost of carrying out your
business so things like paying employees
um paying rent for an office hosting
costs acquiring customers that kind of
thing and business expenses are
important because they get deducted on
the company's tax return to offset any
revenues that are made to lower the
taxes that the company pays and on the
flip side if it's a non business expense
that the company incurs then that is not
deductible on the tax return so that can
increase the profits that the company
then have to pay tax
on so again this is this is a separation
issue um the company will have its own
bank account and that's where the
company's expenses should be paid out of
um again you know thinking about this
from a from a large company if you were
working at Google you would not use a
Google credit card to buy a toothbrush
and
toothpaste so the other thing to
remember is that you know the investors
gave you the this money they trusted you
with all these huge amounts of of of
money and they want you to use that
money to make the company a
success it's not your money for you to
spend how you please and believe me
we've had some horror stories of
Founders who take that approach uh we
had we had one founder that we knew of
who Took investor money and went off to
Vegas and boy by his Facebook photos did
he have a good
time uh needless to say is no longer
with the company um but really this is
this is stealing from the
investors um you know think about it the
the concept of business expenses can get
a little bit blurry especially in the
early days when you're working outside
working in your apartment and you're
working 24 hours a day but the way to
think about it is if an investor asked
me what I'd spent their money on and I
had to give a line by line breakdown of
that would I be embarrassed about
telling any of the telling them what any
of those lines were and if you were it's
probably not a business
expense so the other thing to bear in
mind is that you know you're busy
running your company at 90 miles an hour
just constant constant so you don't have
to necessarily think about the
bookkeeping and accounting at that point
but it's really crucial that you do keep
the receipts so that when you do engage
a bookkeeper or a CPA to prepare your
tax returns
they can unpick all of this and they can
figure out what are business expenses
and what aren't business expenses but
they're going to need your help as a
Founder because they aren't going to
know what all these things are so there
is some involvement from you and the way
to make the involvement the least amount
possible is to keep those documents in a
safe place so that you can refer back to
them so if nothing else that you
remember do not go to Vegas on
Investor's money and spend that money
wisely
okay so um in this section we're going
to talk about just doing business and
we're going to hit a couple of uh a
couple of topics in this section so the
first one is founder
employment why are we talking about
founder employment because as we said a
couple times already the company is a
separate legal entity it exists
completely separate and apart from you
as Founders and so no matter how
prestigious we in the valley think the
title founder is you're you're really
just a Company
employee and Founders have to be paid
working for free against the law and
Founders should not let their company
take on this liability you wouldn't work
for free anywhere else so why is your
startup an exception and companies have
to pay payroll taxes we had a YC company
that completely blew off their payroll
taxes for 3 years it was a huge
expensive disaster and in extreme cases
people can actually go to jail for that
fortunately not in this case but but um
it's bad so the moral of this story is
set up a payroll service this is
something that is worth spending your
money
on but and I actually think I'm sure
some of the other lectures have touched
on this point and actually kiry just
mentioned it too don't go overboard on
lavish salaries minimum wage this is
still a startup and you have to run lean
so now I'm going to mention founder
breakups and um first well what is a
Founder breakup in this context I'm
talking about founder on the team being
asked to leave the company which because
I've just said Founders are employees
that means your co-founders are firing
you um so why are we talking about
breakups in the context of founder
compensation and it's because um at YC
we have seen a ton of founder breakups
and we know that the breakups get extra
ugly when the founders haven't paid
themselves why how does it get ugly um
unpaid wages become leverage for the
fired founder to get something he or she
wants from the company and typically
that is vesting
acceleration so the fire founder says
hey my lawyer says you broke the law by
not paying
me
um but if you pay me and you give me
some shares that I'm actually not really
entitled to I'll sign a release and make
all this ugliness go away and if you're
the remaining co-founders you're
probably like sounds like a good deal
and so now you have a disgruntled person
who owns a piece of your company and
even worse in a sense the remaining
Founders are kind of working for that XF
founder right because they're building
all the value in the company and the XF
founder who got fired is just sitting
there with their shares going that's
right make it
valuable so what's the takeaway here
avoid Problems by paying yourself paying
your payroll taxes and thinking of your
co-founders wages like a marital
prenup and as well as the founders you
are going to need to hire employees and
again A lot has been spoken in previous
in previous classes here about how to
find those people what makes a good fit
how to make them really productive
employees but when you actually find
somebody how how do you hire them you
know what's what's
involved and employment is governed by a
a huge raft of laws um and therefore
it's important to get this
right it's again the kind of
nitty-gritty stuff that as long as you
know the basics you can probably keep
yourself out of most situations but as
soon as things get complicated ated you
need to get yourself involved with a
specialist so the first thing you need
to do is figure out if the employee or
if the person is really an employee or a
contractor and there are subtle
differences to this classification and
this is important to get right because
the IRS takes a big interest in this and
if they think you've got it wrong they
will come after you and with
fines both an employee and a contractor
will sign documents that assign any IP
that they create to the company and
that's obviously really important but
the the form of the document is very
different for each each type of person
and the method of payment's very
different so generally a contractor will
be able to set their own work hours
they'll be able to set their own
location they will be given a project
where there is a an end result but how
they actually get to that and the means
they use will will not be set um they'll
be using their own equipment and they'll
not really have any say in the
day-to-day running of the company or the
strategy going
forward and a contractor will sign a
Consulting agreement and then when the
company pays them the company doesn't
withhold any taxes on their behalf um
that's on the responsibility of the
individual but at the end of the year
the company will provide what's called a
form
1099 to the individual and also a copy
to the IRS which they'll use used to
prepare their personal tax
returns the opposite side of this is is
an employee um and an employee will also
sign some form of Ip assignment
agreement but when the company pays them
the company will withhold taxes from
their salary and then the company is
responsible for paying those taxes over
to the relevant state and federal
authorities and at the end of the year
the employee receives what a W2 form
which will then get used to prepare
their personal tax
returns so as Carolina said the founders
need to be paid so do employees um it
isn't enough to just say well I'm paying
them in stock so that can be that can be
their their
compensation and they need to be paid at
least minimum wage so in San Francisco
which actually has a slightly higher
minimum wage than than California as a
whole that works out about $2,000 a
month so you know it's not a huge amount
but it can add
up there's also another couple of things
that you need to be you need to make
sure that you have if you have employees
so the first thing is that you're
required to have Workers Compensation
Insurance and especially if you're in
New York where the New York authorities
that look after this will send really
threatening letters saying you owe
$50,000 in fine because your one
employee that's being paid minimum wage
has not paid the $20 a month of workers
compensation fees so it is really
important that you do you do set that up
and the other thing that's very
important is that you do need to see
proof that the employee is authorized to
work in the
US you know Founders are not Payroll
Experts and nobody expects you to be one
either this is all just about the basics
but what that does mean is that you
absolutely must use a payroll service
provider uh who will Who will be able to
look after this for you and services
like Zen payroll are again set up
they're focused on startups and they
help you get this set up in the easiest
way possible so that again you can go
back and concentrate on on what you do
best and in the example that Carolyn
gave just a few minutes ago if that
company had actually set themselves up
with a payroll service provider all of
that heartache would have gone away
because it would all have just been
looked after for them they were trying
to save money by not doing it and look
where it got them
so that's that's really the key thing
use use a payroll service provider and
make sure that you understand the basics
of employment we're running start on
time yeah um okay so I can Breeze
through really fast firing employees
slide and then sh or should we cut it
off now for questions what uh why don't
me do firing real fast okay okay okay so
somebody at YC once said you're not a
real founder until you've had to fire
somebody why is that because because
firing people is really hard it's hard
for a lot of reasons uh including
because Founders tend to hire their
friends they tend to hire former
co-workers or they just get really close
to their employees because working at a
startup is really intense but in every
company there's going to be an employee
who doesn't work out and firing a
Founder sorry firing this employee makes
a Founder a real professional because he
or she has to do what is right for the
company instead of what is easy so I
have um some best practices for how to
fire someone um number one fire quickly
don't let a bad employee linger it's so
easy to put off a difficult conversation
but there is only downside to
procrastination if a toxic employee
stays around too long good employees May
quit and if the employee is actually
screwing up the job you may lose
business or
users number two communicate effectively
don't rationalize don't make excuses
don't equivocate about why you're firing
the employee make clear direct
statements don't apologize example we're
letting you go not I'm so sorry sales
didn't take off this quarter blah blah
blah um fire the employee face to face
and ideally with a third party
present number three pay all wages and
ACR vacation immediately this is a legal
requirement that we don't debate or
negotiate this number four cut off
access to digital systems once an
employe is out the door cut off physical
and digital access control information
on in the cloud change passwords Etc we
we had a situation at YC where one
founder had access to the company's
GitHub account and held the password
hostage when his co-founders tried to
fire him and number five um if the
terminated employee has any invested
shares the company should repurchase
them right away so the takeaway here is
that as surprising as this may sound one
of the Hallmarks of a really effective
startup founder is how well he or she
handles employee termination
uh okay so then we had this section that
we called legitimacy which actually kind
of goes into a little bit more about um
you know how to be how to be a real
company how to be sort of a grown-up
company and we can totally jettison is
this the last slide
uh no that could be the last SL could be
the last slide okay so um Cy you want to
read the takeaways okay so we we've
pretty much covered all of these anyway
um but you know the basic the basic
tenant to all of this is keep it simple
do all the standard stuff and keep it
organized make sure you know what you're
doing um Equity ownership is really
important so make sure that you're
thinking about the future rather than
the three months of the history of the
company and stock doesn't buy itself so
again make sure you do the paperwork for
that make sure that you actually know
about the financing documents that
you're signing up to it's not enough to
just say yeah I'll take your 100K make
sure you actually know those
rights and you need to get paid you and
the employees need to be paid and then
everybody needs to assign IP to the
company because if the company does not
own that IP there is no value in the
company if an employee must be fired
then as Carolyn as Carolyn was saying do
it quickly and
professionally uh the couple of things
that we didn't mention was knowing your
key metrics at any time you should know
the cash position you should know your
burn rate you should know when that cash
is going to run out um so that you can
talk to your investors about that and
you know a lot of running a company is
following the rules and taking it
seriously it's not all the Glamorous
bits that we see in all the movies and
and TV shows so you do have to take that
seriously okay so it was shorter when we
did it the first time sorry about that
sorry you can get like two questions
sure yeah how do you advise searching
for an accountant and when in the
process do you need them so there's two
so the question was how do you advise
searching for an accountant and when do
you um when at what point do you do this
so there's two different things there's
a bookkeeper and there's a CPA an
accountant and generally bookkeepers
will be the ones who can categorize all
your expenses and CPAs are the ones that
will prepare your tax returns
um in the very very early days it's
probably fine for the founders to just
be able to see the bank statements and
to be able to see those expenses coming
out but tax returns have to be prepared
annually and so at some point in that
first year of the company's life some
service is going to need to be engaged
to do that because it's just not worth
the founders time to do it um there are
services available like indero which
kind of try to to um make things as as
effortless as possible from the
Founder's point of view so that kind of
thing is quite useful but you do need to
get a CPA at some point because you need
to file your annual tax returns for the
company and how do you find one um
finding one is kind of tough probably
the best thing is recommendations from
people with with any kind of specialist
a CPA or an account a lawyer or anything
like that it's always best to use people
who are used to dealing with startups
again not your sort of you know your who
lives in Minnesota and doesn't actually
know how startups work so probably
recommendations are the best
way all things considered what should be
my budget for you know in cooperating
with a lawyer for getting legal advis
for my first seed round and then for
hiring the first employees how much
money should I set aside for
that so it's in terms of incorporation
don't spend a dime on that you can do
that online well actually I'm sorry it
does cost a little bit
um incorporating online using a a
service like clerky which chisty
mentioned is inexpensive like in the
hundreds not in the thousands so you
don't need a lawyer for that part when
you actually need to hire a lawyer is it
kind of depends on what business you are
starting um and how complicated it is in
terms of you know do you have a lot of
privacy policies you it's Hippa involved
I mean you can imagine there's like a
ton um and so and also then you
mentioned when you're raising your seed
round well how much money are you
raising and who are the investors and
what kind of terms are in the term sheet
sometimes that dictates whether or not
you need to get legal counsel and again
a service like clerky can help if you
are just using very standard documents
for the fundraising there are just very
basic vanilla fundraising documents so
you can use those and again they they
cost you know less less than $100 I
think um which can which can save you
some legal
fees one more question uh do you want to
pick uh should we go back over this side
I'm going to
ignore let's go up for here um do you
guys have any advice or comment on the
complexity that comes with working with
cryptocurrencies or crypto equities in
particular like if you're fundraising
since that's becoming more and more
popular oh wow that's a tough question
to end with um yes there are some there
are some issues often banks will
struggle to deal with with companies
that are working in cryptocurrencies
because they haven't quite figured out
how to to deal with it and and that sort
of thing yet
um generally a lot of it it it it's very
product specific it's it's not something
that kind of has real general advice
unfortunately okay thank you very much
you're welcome