9 ms·

Lecture 18: Legal and Accounting Basics for Startups

247 points by sama 12y ago

graycat 12y ago
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., the lecture told me that the Silicon Valley way is awash in onerous, nearly intolerable, often seriously dysfunctional, financial, legal, organizational, etc. overhead that is unnecessary and should be dumped into SF Bay and forgotten about. Instead, with some irony, I remember the advice of Ron Conway in Lecture 9 http://startupclass.samaltman.com/courses/lec09/ http://startupclass.samaltman.com/courses/lec09/ in praise of bootstrapping. My view: Be a solo, technical founder. Plan the start-up; get a computer; write the software; own 100% of the business; organize as a Sub-chapter S or LLC; get users/customers and revenue; do not accept equity funding; grow the business; smile all the way to the bank; and totally just f'get about VC, liquidation preferences, pro-rata rights, vesting, reporting to a board of directors, a Delaware corporation, etc. Vesting: That's where a solo founder who owns 100% of a business -- and it's got to be a pretty good business before it qualifies for VC equity funding, e.g., see (5) below -- has the business take an equity check and suddenly owns 0% of the business, to start to get back some ownership gets a four year vesting schedule with a one year cliff, takes on a lot of expensive, onerous overhead, and reports to a BoD with people with a fiduciary responsibility to (themselves and) their limited partners, that can fire the founder for any reason or no reason (thus costing the founder his unvested stock -- do that in the first year and the founder gave his business away to the investors for a small salary for a few months and $0.00) who are non-technical and the founder would not want to hire in the business, who do not write code, who commonly claim they have "deep domain knowledge" (an outrageous belly laugh) and, really, do not understand the business. Total bummer. To me, if a well qualified technical founder believes that he needs co-founders and/or equity funding, then, instead, he should think of a better business idea that doesn't need those and that he can do as a solo founder. Some really good news: The US is just awash, border to border, crossroads, villages, ..., to the biggest cities with successful businesses 100% owned by solo founders. Indeed, from all I've seen, it is mostly just such founders who own houses, vacation houses, super-cars, boats, and jewelry worth $1+ million each and pay full tuition for K-12 private schools and Ivy League colleges. E.g., own 10 fast food restaurants, several new car dealerships, a good independent insurance agency, be a successful dentist, have a good construction firm of larger buildings, own and rent real estate, etc. Further, actually can do fairly well in coin laundries, pizza shops, Chinese carry outs, landscaping, ..., even just grass mowing and snow plowing. And of course these solo founder Main Street, USA businesses nearly never have VC or even equity funding. Even better news: What can be done in principle, and sometimes in practice, with a computer that costs $2000- and an Internet connection with upload speed of 25 Mbps is just staggering, nearly beyond belief. E.g., there was the Canadian romantic matchmaking start-up Plenty of Fish, long just one guy, two old Dell servers, ads just from Google, and $10 million in annual revenue. Five points: (1) For more, a big lesson of the Altman course, YC, and VC is that there is a big risk of disaster from co-founder disputes but also a big theme of don't be a solo founder. Maybe there are some good reasons investors don't like solo founders, but I can see big reasons well qualified technical founders should want to be solo founders. (2) For more, this latest lecture and much more, e.g., John Doerr from KPCB, keep saying that ideas are easy, plentiful, and worthless and that execution is challenging, risky, and everything. My version would be, good ideas are challenging, rare, valuable, and nearly everything and, given a good idea, execution is routine and reliable. It appears that Silicon Valley (SV) believes that an idea is just some one sentence product description a founder might explain to his neighbor and regards everything else as execution. So, it appears that SV fails to understand what else should be in a good idea. No wonder on average VC has poor ROI: http://www.avc.com/a_vc/2013/02/venture-capital-returns.html#disqus_thread http://www.avc.com/a_vc/2013/02/venture-capital-returns.html... But a good idea might be based on some original research, secret sauce, challenging for others to duplicate, and be protected as a trade secret or with a patent. Some people believe that some trade secrets and patents are valuable assets, maybe just crucial to the business, and not easy, plentiful, or worthless. So a founder wants to report to a BoD that believes that ideas are worthless? What about some original and solid ideas for much more effective ad targeting? Easy? Worthless? Gads. (3) For more, VCs keep saying that a start-up that claims that they have no competition is just silly, that there is always competition or at least near substitutes. Let's see: What about the original Xerox 914 copier, a license to print money? (4) For more, there is the common claim that whatever a start-up is doing, it is not the first. Hmm .... Suppose we take the set of all efforts that did the same thing and there consider the effort that was started with the earliest date. Then that effort contradicts the claim. (5) For more, some of the VC arithmetic doesn't work out: E.g., once Menlo Ventures wrote me that they would not consider an investment in my work before I had 100,000 unique visitors a month. Okay, assume (a) each month, on average, each unique visitor comes 5 times and each time sees 8 Web pages, (b) each Web page has on average 4 ads, and (c) get paid $1 per 1000 ads displayed. Then the monthly revenue would be 100,000 * 5 * 8 * 4 * 1 / ( 1000 ) = 16,000 dollars. If the site soon has 100,000 unique visitors a month, then maybe soon it will have 1 million and, right, $160,000 a month. But the CapEx to serve 1 million uniques a month? Let's see: That would be an average of 1 * 10**6 * 5 * 8 / ( 3600 * 24 * 30 ) = 15.4 Web pages a second. Even if need, say, CapEx, of 30 servers at $2000 each, that's just 30 * 2000 = 60,000 dollars to get revenue of $160,000 a month. So, buy the servers in the first month and just use them in future months. I can understand that a start-up with 100,000 unique visitors a month and five co-founders, each with a pregnant wife, might very much want some equity funding. So, be a solo founder. In simple terms, by the time a solo founder has a business of interest to VCs, he has high motivation just to continue to own 100% of the business and f'get about equity funding. With points (1)-(5), I see a pattern: Denigrate founders. Net, I'm missing why good technical founders should want to be on that bus. Yes, YMMV.
- danieltillett 12y ago
  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.
- Udo 12y ago
  > 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.
  - snapplehat 12y ago
    I'm just gonna comment here...
- brackenbury 12y ago
  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. This just makes it easier for the investors to boot one of the founders if needed, and does not serve any other purpose. This video should be taken with a grain of salt.
mrkurt 12y ago
Kirsty was one of the quietly powerful parts of ycombinator. I'm glad she got to do a class. :)
cperciva 12y ago
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?
- deleted 12y ago
  [deleted]
- toomuchtodo 12y ago
  > Is this just a case of requiring a peppercorn? Yes. > If not, how do $1/year salaries work? It depends on each state's regulations.
- TheBiv 12y ago
  What is requiring a peppercorn? Google wasn't of much help
  - nols 12y ago
    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.
  - cperciva 12y ago
    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.
- gamblor956 12y ago
  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.
7Figures2Commas 12y ago
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 argument overlooks is the that most companies are never able to raise institutional capital. So incorporating in another state for investors you don't have is entity selection's form of premature optimization. Investors look to invest in promising businesses; they aren't seeking out investments in Delaware companies. The second problem with this argument is that it pretends entity selection can't be easily revisited. It can. As I have pointed out before[1], converting to a Delaware corporation is generally a straightforward process. If you have a California LLC, for instance, and need to convert to a Delaware C corporation, it is unlikely to be anywhere near the most complicated or costly part of a financing. Telling founders they don't need to understand legal and accounting nitty gritty and that they should just follow boilerplate advice ("form a Delaware C corp") is in my opinion bad advice. Understanding the details and why you're doing something won't guarantee that you build a great business, but it can save a great business from legal, tax and accounting mistakes that can be fatal. [1] https://news.ycombinator.com/item?id=8393109 https://news.ycombinator.com/item?id=8393109
- calcsam 12y ago
  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.
  - bradleybuda 12y ago
    As someone who has pitched many investors, sometimes successfully, I can tell you that nobody ever asked about the incorporation status of my company until well after the deal was agreed to. Investors care about you, your team, your traction, and your product. Everything else (including some terrible incorporation and accounting mishaps) can and will be fixed if your company is good. I would be more suspicious of a founder that spends too much time getting their incorporation just right - for businesses that are going to raise institutional capital, that's really the least of your concerns.
jcliff 12y ago
Does anyone have any recommendations for incorporating in Nevada? I plan to do business primarily in Nevada and understand that it is also a very business friendly state for incorporating. Unfortunately, clerky.com only handles Deleware corps. I'm currently considering doing it myself, rocketlawyer and legalzoom.
- jknightco 12y ago
  Nevada is great for LLCs; I run my consulting business as a Nevada LLC and originally set everything up via LegalZoom. That said, I think you're actually better off doing things yourself via their SilverFlume site [1], as you'll save yourself some money and you'll be able to make changes via the same portal down the road. [1] https://nvsilverflume.gov/home https://nvsilverflume.gov/home
lukasm 12y ago
Pretty good bang per minute ratio. If company is a Delaware company, does it mean I have to pay myself Delaware min-wage?
- tim333 12y ago
  Pretty sure min-wages depend on the place of employment, not where the company is incorporated.
- gamblor956 12y ago
  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.
- Spooky23 12y ago
  No, minimum wage is based in where work is performed. There was an NPR report not long ago about a shopping mall that sits in two towns -- there is a significant wage delta in each side of the mall!
  - dudurocha 12y ago
    That is the piece: http://www.npr.org/blogs/money/2014/08/28/343430393/a-mall-with-two-minimum-wages http://www.npr.org/blogs/money/2014/08/28/343430393/a-mall-w...
nickcronin 12y ago
A great article and some interesting tools listed. We have been working with a lot of startups to help them get proposals from lawyers and accountants at ExpertBids.com. Think of it as a elance / odesk for lawyers and accountants. Any suggestions anyone has for continuing to help startups find the right professional for legal and accounting work would be much appreciated.
rajens 12y ago
As someone who's never personally raised any VC, but has been in the startup space for a while...I thought they did a really good job on making things easily to understand as an introduction to VC. I also liked their insights into the value of advisors, investors, and board members, and particularly, what requests are considered legitimate/illegitimate. You can check out my top quotes from the lecture summarized here: https://medium.com/@RajenSanghvi/59-quotes-from-kirsty-nathoo-carolynn-levy-on-legal-accounting-basics-for-startups-a7924ec2f7b https://medium.com/@RajenSanghvi/59-quotes-from-kirsty-natho...
simantel 12y ago
Does anyone have a good resource for legal and accounting basics for single-founder lifestyle businesses?
- lunaru 12y ago
  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 accountant down the road, the advice you receive will have good context. Tech analogy: it's easier to build a website for someone who understands what a "CTA" is.
  - amorphid 12y ago
    CTA... Call to action?
    - gobengo 12y ago
      Yes
- danieltillett 12y ago
  You basically need to know about everything. I personally like reading about this sort of stuff. What I did is just look up the reading lists of the appropriate subjects at the university I was at and started reading down the list. Since these are on the reading list the university will have dozens of copies of the books on the shelf - just make sure you do this out of cycle (i.e. Read the term 1 books during term 2 and vice versa) or else you will be fighting with the students to get hold of them.
- petercooper 12y ago
  You're undoubtedly in a different country to me, but here in the UK I had a lot of initial success with reading the reasonably generic "Tax for Small Businesses" and "Accounting for Small Businesses" type books that always seem to sell well. Then over the year I just drilled down on the areas where I needed more depth. Having a one stop shop book helped me get the foundations down before moving on to reading articles online.
foreign-inc 12y ago
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?
- chasb 12y ago
  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.
  - foreign-inc 12y ago
    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.
    - chasb 12y ago
      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.
      - swampthing 12y ago
        Exactly, and salaries are generally deductible as a business expense from the company's income. So you're not getting double-taxed there.
        foreign-inc 12y ago
        I am certain that you pay taxes on revenue, not on profit.
        gamblor956 12y ago
        Businesses pay tax on profit, not revenue.
tiffanyh 12y ago
Can someone explain in more detail the valuation cap notion (video 20:00-22:00mmss)
- mikeyouse 12y ago
  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-about-convertible-debt-at-startups-and-the-hidden-terms-you-didnt-understand/ 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.
foreign-inc 12y ago
If you are a permanent resident living in SV and want to build a developer team in your home country, what is the best way to structure the company? I understand that it is best to talk to a lawyer but I would really appreciate if anyone can share their experience in this regard or can give some general guidance.
ohazi 12y ago
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 (founders might want employees to think that a pittance is reasonable, employees might embellish when talking to others, etc). What do you do if you just want to be fair? What do you do differently for employees #1 and #2 vs #10, #20, etc (assuming you ever get that big)? How do you adjust for differences in expected value of the employee to the company (e.g. recent grad vs. senior "executive" type with valuable industry connections)? When should you allocate an employee equity pool and how do you size it appropriately?
- corford 12y ago
  Doesn't answer everything but does give you some real world ranges to consider: http://codingvc.com/analyzing-angellist-job-postings-part-1-basic-stats http://codingvc.com/analyzing-angellist-job-postings-part-1-... (was posted to HN a few days ago I think).
brackenbury 12y ago
This lecture is from YCombinator and may be a bit self serving. I would take it with a grain of salt. I have noticed that YCombinator prefers multiple cofounders, and in this video they are now saying the cofounders all need to have the same amount of stock regardless of how much work you have put in in the past. That's very surprising advice. You may have slogged for a couple of years before taking on a cofounder, and you should both have the same amount of shares? This is not in your interest, but may be in YCombinator's: if they need to separate you from your company it is easier this way.
- leeber 12y ago
  A co-founder is not somebody you take on 2 years down the road.
leeber 12y ago
I am working on a project that I need to incorporate soon, but I have no plans to take on any investors at all if I can manage it (i.e. and grow organically). Any reason to do a C-corp vs. LLC in that scenario? (Either way I was planning on using Delaware even before watching this video)
suchthrowaway 12y ago
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.
- TheBiv 12y ago
  Very interesting. Considering your scenario, would you advise others to not have a cliff or have a X month cliff?
  - suchthrowaway 12y ago
    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.
    - brackenbury 12y ago
      Trust is not a binary value. When large sums of money are involved you don't want to rely solely on trust.
- SeoxyS 12y ago
  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.
anonymouse5 12y ago
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 ?
jackgavigan 12y ago
"In the top YC companies - those with the highest valuations - there are zero instances where the founders have had a disproportionate equity split." I guess that's as good an answer we're going to get to the Dropbox question (at least until they IPO).

247 points by sama 12y ago

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., the lecture told me that the Silicon Valley way is awash in onerous, nearly intolerable, often seriously dysfunctional, financial, legal, organizational, etc. overhead that is unnecessary and should be dumped into SF Bay and forgotten about. Instead, with some irony, I remember the advice of Ron Conway in Lecture 9 http://startupclass.samaltman.com/courses/lec09/ http://startupclass.samaltman.com/courses/lec09/ in praise of bootstrapping. My view: Be a solo, technical founder. Plan the start-up; get a computer; write the software; own 100% of the business; organize as a Sub-chapter S or LLC; get users/customers and revenue; do not accept equity funding; grow the business; smile all the way to the bank; and totally just f'get about VC, liquidation preferences, pro-rata rights, vesting, reporting to a board of directors, a Delaware corporation, etc. Vesting: That's where a solo founder who owns 100% of a business -- and it's got to be a pretty good business before it qualifies for VC equity funding, e.g., see (5) below -- has the business take an equity check and suddenly owns 0% of the business, to start to get back some ownership gets a four year vesting schedule with a one year cliff, takes on a lot of expensive, onerous overhead, and reports to a BoD with people with a fiduciary responsibility to (themselves and) their limited partners, that can fire the founder for any reason or no reason (thus costing the founder his unvested stock -- do that in the first year and the founder gave his business away to the investors for a small salary for a few months and $0.00) who are non-technical and the founder would not want to hire in the business, who do not write code, who commonly claim they have "deep domain knowledge" (an outrageous belly laugh) and, really, do not understand the business. Total bummer. To me, if a well qualified technical founder believes that he needs co-founders and/or equity funding, then, instead, he should think of a better business idea that doesn't need those and that he can do as a solo founder. Some really good news: The US is just awash, border to border, crossroads, villages, ..., to the biggest cities with successful businesses 100% owned by solo founders. Indeed, from all I've seen, it is mostly just such founders who own houses, vacation houses, super-cars, boats, and jewelry worth $1+ million each and pay full tuition for K-12 private schools and Ivy League colleges. E.g., own 10 fast food restaurants, several new car dealerships, a good independent insurance agency, be a successful dentist, have a good construction firm of larger buildings, own and rent real estate, etc. Further, actually can do fairly well in coin laundries, pizza shops, Chinese carry outs, landscaping, ..., even just grass mowing and snow plowing. And of course these solo founder Main Street, USA businesses nearly never have VC or even equity funding. Even better news: What can be done in principle, and sometimes in practice, with a computer that costs $2000- and an Internet connection with upload speed of 25 Mbps is just staggering, nearly beyond belief. E.g., there was the Canadian romantic matchmaking start-up Plenty of Fish, long just one guy, two old Dell servers, ads just from Google, and $10 million in annual revenue. Five points: (1) For more, a big lesson of the Altman course, YC, and VC is that there is a big risk of disaster from co-founder disputes but also a big theme of don't be a solo founder. Maybe there are some good reasons investors don't like solo founders, but I can see big reasons well qualified technical founders should want to be solo founders. (2) For more, this latest lecture and much more, e.g., John Doerr from KPCB, keep saying that ideas are easy, plentiful, and worthless and that execution is challenging, risky, and everything. My version would be, good ideas are challenging, rare, valuable, and nearly everything and, given a good idea, execution is routine and reliable. It appears that Silicon Valley (SV) believes that an idea is just some one sentence product description a founder might explain to his neighbor and regards everything else as execution. So, it appears that SV fails to understand what else should be in a good idea. No wonder on average VC has poor ROI: http://www.avc.com/a_vc/2013/02/venture-capital-returns.html#disqus_thread http://www.avc.com/a_vc/2013/02/venture-capital-returns.html... But a good idea might be based on some original research, secret sauce, challenging for others to duplicate, and be protected as a trade secret or with a patent. Some people believe that some trade secrets and patents are valuable assets, maybe just crucial to the business, and not easy, plentiful, or worthless. So a founder wants to report to a BoD that believes that ideas are worthless? What about some original and solid ideas for much more effective ad targeting? Easy? Worthless? Gads. (3) For more, VCs keep saying that a start-up that claims that they have no competition is just silly, that there is always competition or at least near substitutes. Let's see: What about the original Xerox 914 copier, a license to print money? (4) For more, there is the common claim that whatever a start-up is doing, it is not the first. Hmm .... Suppose we take the set of all efforts that did the same thing and there consider the effort that was started with the earliest date. Then that effort contradicts the claim. (5) For more, some of the VC arithmetic doesn't work out: E.g., once Menlo Ventures wrote me that they would not consider an investment in my work before I had 100,000 unique visitors a month. Okay, assume (a) each month, on average, each unique visitor comes 5 times and each time sees 8 Web pages, (b) each Web page has on average 4 ads, and (c) get paid $1 per 1000 ads displayed. Then the monthly revenue would be 100,000 * 5 * 8 * 4 * 1 / ( 1000 ) = 16,000 dollars. If the site soon has 100,000 unique visitors a month, then maybe soon it will have 1 million and, right, $160,000 a month. But the CapEx to serve 1 million uniques a month? Let's see: That would be an average of 1 * 10**6 * 5 * 8 / ( 3600 * 24 * 30 ) = 15.4 Web pages a second. Even if need, say, CapEx, of 30 servers at $2000 each, that's just 30 * 2000 = 60,000 dollars to get revenue of $160,000 a month. So, buy the servers in the first month and just use them in future months. I can understand that a start-up with 100,000 unique visitors a month and five co-founders, each with a pregnant wife, might very much want some equity funding. So, be a solo founder. In simple terms, by the time a solo founder has a business of interest to VCs, he has high motivation just to continue to own 100% of the business and f'get about equity funding. With points (1)-(5), I see a pattern: Denigrate founders. Net, I'm missing why good technical founders should want to be on that bus. Yes, YMMV.

danieltillett 12y ago
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.
Udo 12y ago
> 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.
- snapplehat 12y ago
  I'm just gonna comment here...
brackenbury 12y ago
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. This just makes it easier for the investors to boot one of the founders if needed, and does not serve any other purpose. This video should be taken with a grain of salt.

mrkurt 12y ago

Kirsty was one of the quietly powerful parts of ycombinator. I'm glad she got to do a class. :)

cperciva 12y ago

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?

deleted 12y ago
[deleted]
toomuchtodo 12y ago
> Is this just a case of requiring a peppercorn? Yes. > If not, how do $1/year salaries work? It depends on each state's regulations.
TheBiv 12y ago
What is requiring a peppercorn? Google wasn't of much help
- nols 12y ago
  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.
- cperciva 12y ago
  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.
gamblor956 12y ago
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.

7Figures2Commas 12y ago

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 argument overlooks is the that most companies are never able to raise institutional capital. So incorporating in another state for investors you don't have is entity selection's form of premature optimization. Investors look to invest in promising businesses; they aren't seeking out investments in Delaware companies. The second problem with this argument is that it pretends entity selection can't be easily revisited. It can. As I have pointed out before[1], converting to a Delaware corporation is generally a straightforward process. If you have a California LLC, for instance, and need to convert to a Delaware C corporation, it is unlikely to be anywhere near the most complicated or costly part of a financing. Telling founders they don't need to understand legal and accounting nitty gritty and that they should just follow boilerplate advice ("form a Delaware C corp") is in my opinion bad advice. Understanding the details and why you're doing something won't guarantee that you build a great business, but it can save a great business from legal, tax and accounting mistakes that can be fatal. [1] https://news.ycombinator.com/item?id=8393109 https://news.ycombinator.com/item?id=8393109

calcsam 12y ago
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.
- bradleybuda 12y ago
  As someone who has pitched many investors, sometimes successfully, I can tell you that nobody ever asked about the incorporation status of my company until well after the deal was agreed to. Investors care about you, your team, your traction, and your product. Everything else (including some terrible incorporation and accounting mishaps) can and will be fixed if your company is good. I would be more suspicious of a founder that spends too much time getting their incorporation just right - for businesses that are going to raise institutional capital, that's really the least of your concerns.

jcliff 12y ago

Does anyone have any recommendations for incorporating in Nevada? I plan to do business primarily in Nevada and understand that it is also a very business friendly state for incorporating. Unfortunately, clerky.com only handles Deleware corps. I'm currently considering doing it myself, rocketlawyer and legalzoom.

jknightco 12y ago
Nevada is great for LLCs; I run my consulting business as a Nevada LLC and originally set everything up via LegalZoom. That said, I think you're actually better off doing things yourself via their SilverFlume site [1], as you'll save yourself some money and you'll be able to make changes via the same portal down the road. [1] https://nvsilverflume.gov/home https://nvsilverflume.gov/home

lukasm 12y ago

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

tim333 12y ago
Pretty sure min-wages depend on the place of employment, not where the company is incorporated.
gamblor956 12y ago
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.
Spooky23 12y ago
No, minimum wage is based in where work is performed. There was an NPR report not long ago about a shopping mall that sits in two towns -- there is a significant wage delta in each side of the mall!
- dudurocha 12y ago
  That is the piece: http://www.npr.org/blogs/money/2014/08/28/343430393/a-mall-with-two-minimum-wages http://www.npr.org/blogs/money/2014/08/28/343430393/a-mall-w...

nickcronin 12y ago

A great article and some interesting tools listed. We have been working with a lot of startups to help them get proposals from lawyers and accountants at ExpertBids.com. Think of it as a elance / odesk for lawyers and accountants. Any suggestions anyone has for continuing to help startups find the right professional for legal and accounting work would be much appreciated.

rajens 12y ago

As someone who's never personally raised any VC, but has been in the startup space for a while...I thought they did a really good job on making things easily to understand as an introduction to VC. I also liked their insights into the value of advisors, investors, and board members, and particularly, what requests are considered legitimate/illegitimate. You can check out my top quotes from the lecture summarized here: https://medium.com/@RajenSanghvi/59-quotes-from-kirsty-nathoo-carolynn-levy-on-legal-accounting-basics-for-startups-a7924ec2f7b https://medium.com/@RajenSanghvi/59-quotes-from-kirsty-natho...

simantel 12y ago

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

lunaru 12y ago
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 accountant down the road, the advice you receive will have good context. Tech analogy: it's easier to build a website for someone who understands what a "CTA" is.
- amorphid 12y ago
  CTA... Call to action?
  - gobengo 12y ago
    Yes
danieltillett 12y ago
You basically need to know about everything. I personally like reading about this sort of stuff. What I did is just look up the reading lists of the appropriate subjects at the university I was at and started reading down the list. Since these are on the reading list the university will have dozens of copies of the books on the shelf - just make sure you do this out of cycle (i.e. Read the term 1 books during term 2 and vice versa) or else you will be fighting with the students to get hold of them.
petercooper 12y ago
You're undoubtedly in a different country to me, but here in the UK I had a lot of initial success with reading the reasonably generic "Tax for Small Businesses" and "Accounting for Small Businesses" type books that always seem to sell well. Then over the year I just drilled down on the areas where I needed more depth. Having a one stop shop book helped me get the foundations down before moving on to reading articles online.

foreign-inc 12y ago

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?

chasb 12y ago
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.
- foreign-inc 12y ago
  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.
  - chasb 12y ago
    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.
    - swampthing 12y ago
      Exactly, and salaries are generally deductible as a business expense from the company's income. So you're not getting double-taxed there.
      - foreign-inc 12y ago
        I am certain that you pay taxes on revenue, not on profit.
        gamblor956 12y ago
        Businesses pay tax on profit, not revenue.

tiffanyh 12y ago

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

mikeyouse 12y ago
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-about-convertible-debt-at-startups-and-the-hidden-terms-you-didnt-understand/ 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.

foreign-inc 12y ago

If you are a permanent resident living in SV and want to build a developer team in your home country, what is the best way to structure the company? I understand that it is best to talk to a lawyer but I would really appreciate if anyone can share their experience in this regard or can give some general guidance.

ohazi 12y ago

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 (founders might want employees to think that a pittance is reasonable, employees might embellish when talking to others, etc). What do you do if you just want to be fair? What do you do differently for employees #1 and #2 vs #10, #20, etc (assuming you ever get that big)? How do you adjust for differences in expected value of the employee to the company (e.g. recent grad vs. senior "executive" type with valuable industry connections)? When should you allocate an employee equity pool and how do you size it appropriately?

corford 12y ago
Doesn't answer everything but does give you some real world ranges to consider: http://codingvc.com/analyzing-angellist-job-postings-part-1-basic-stats http://codingvc.com/analyzing-angellist-job-postings-part-1-... (was posted to HN a few days ago I think).

brackenbury 12y ago

This lecture is from YCombinator and may be a bit self serving. I would take it with a grain of salt. I have noticed that YCombinator prefers multiple cofounders, and in this video they are now saying the cofounders all need to have the same amount of stock regardless of how much work you have put in in the past. That's very surprising advice. You may have slogged for a couple of years before taking on a cofounder, and you should both have the same amount of shares? This is not in your interest, but may be in YCombinator's: if they need to separate you from your company it is easier this way.

leeber 12y ago
A co-founder is not somebody you take on 2 years down the road.

leeber 12y ago

I am working on a project that I need to incorporate soon, but I have no plans to take on any investors at all if I can manage it (i.e. and grow organically). Any reason to do a C-corp vs. LLC in that scenario? (Either way I was planning on using Delaware even before watching this video)

suchthrowaway 12y ago

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.

TheBiv 12y ago
Very interesting. Considering your scenario, would you advise others to not have a cliff or have a X month cliff?
- suchthrowaway 12y ago
  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.
  - brackenbury 12y ago
    Trust is not a binary value. When large sums of money are involved you don't want to rely solely on trust.
SeoxyS 12y ago
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.

anonymouse5 12y ago

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 ?

jackgavigan 12y ago

"In the top YC companies - those with the highest valuations - there are zero instances where the founders have had a disproportionate equity split." I guess that's as good an answer we're going to get to the Dropbox question (at least until they IPO).