YC

Y Combinator Cast

04/28/17

@ Y Combinator

Founders don't need to know the mechanics of starting a startup in detail, as getting bogged down in details can be dangerous.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

It's crucial for founders to form their startup as a separate legal entity to protect themselves from personal liability.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

Delaware is the preferred state for forming corporations because its laws are clear and investors are comfortable with Delaware corporations.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

Execution is more valuable than the idea itself; founders should not give disproportionate equity to the person who came up with the idea.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

In a startup with multiple founders, equity allocation should ideally be equal to avoid potential conflicts and ensure trust among the team.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

Founders must sign stock purchase agreements and 83(b) elections to ensure proper ownership and tax implications of their shares.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

Vesting means that founders gain full ownership of their stock over time, and if they leave before the vesting period ends, they may lose unvested shares.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

The standard vesting period for stock in Silicon Valley is four years with a one-year cliff, meaning founders earn 25% of their shares after one year.

KN

Kirsty Nathoo

04/28/17

@ Y Combinator

Vesting is crucial for founders because it prevents a situation where a founder leaves the company and takes a significant portion of equity with them, which would be unfair to the remaining founders.

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Kirsty Nathoo

04/28/17

@ Y Combinator

Founders need to be incentivized to continue working on their startup; without vesting, they could walk away with full ownership at any time, which undermines their commitment to the company.

KN

Kirsty Nathoo

04/28/17

@ Y Combinator

Single founders should implement vesting on their shares to set a cultural example for employees, demonstrating that everyone is committed to the long-term success of the company.

KN

Kirsty Nathoo

04/28/17

@ Y Combinator

Vesting aligns incentives among founders, ensuring they all work together to grow the company before any of them can benefit from their equity.

KN

Kirsty Nathoo

04/28/17

@ Y Combinator

Investors prefer companies where founders are committed and cannot easily quit while retaining a large equity stake, as this reduces risk for their investment.

KN

Kirsty Nathoo

04/28/17

@ Y Combinator

When raising money, there are two ways to do it: either the price is set for the investment or it isn't, which typically involves convertible notes or safes.

KN

Kirsty Nathoo

04/28/17

@ Y Combinator

In a non-priced round, investors often have a valuation cap that sets an upper limit on the company's valuation for future share conversions, rewarding early investors with more shares if the company grows significantly.

KN

Kirsty Nathoo

04/28/17

@ Y Combinator

It's essential to keep track of signed documents when raising money, as different investors may have varying rights and obligations.

KN

Kirsty Nathoo

04/28/17

@ Y Combinator

It's vital for founders to stay informed about the financial and legal aspects of their startup, as misunderstandings can lead to significant issues down the line.

KN

Kirsty Nathoo

04/28/17

@ Y Combinator

Business expenses, such as employee salaries and office rent, are crucial for startups as they can be deducted from taxes, reducing the overall tax burden on the company.

KN

Kirsty Nathoo

04/28/17

@ Y Combinator

Founders must use investor funds responsibly to build the company, as misusing these funds can lead to severe consequences, including losing investor trust and support.

KN

Kirsty Nathoo

04/28/17

@ Y Combinator

When considering expenses, founders should ask themselves if they would feel embarrassed explaining their spending to investors; if so, it likely isn't a legitimate business expense.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

Keep your receipts organized so when you hire a bookkeeper or CPA for tax returns, they can accurately identify business expenses.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

As a founder, you must be involved in financial documentation because your bookkeeper or CPA won't know the specifics of your business expenses.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

Don't misuse investor funds; spend wisely and avoid extravagant expenses like gambling.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

Founders must be paid as employees; working for free is illegal and can create liabilities for the company.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

Set up a payroll service to manage employee payments and payroll taxes effectively, as neglecting this can lead to severe financial consequences.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

Avoid lavish salaries; maintain a lean operation and pay yourself at least minimum wage to ensure financial sustainability.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

Founder breakups can become contentious if founders haven't paid themselves, leading to leverage for the fired founder in negotiations.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

Pay yourself and your co-founders to avoid complications during founder breakups; think of co-founder wages like a marital prenup.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

When hiring employees, ensure you understand employment laws and the differences between employees and contractors, as misclassification can lead to IRS scrutiny.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

Contractors set their own hours and work independently, while employees have taxes withheld from their paychecks and are subject to company control.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

Founders need to ensure employees are paid at least minimum wage, which in San Francisco is about $2,000 a month.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

It's crucial to have workers' compensation insurance for employees to avoid hefty fines from state authorities.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

Always verify that employees are authorized to work in the U.S. to avoid legal issues.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

Utilize a payroll service provider to handle employee payments and compliance, allowing you to focus on your startup's core activities.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

Firing an employee is a difficult but necessary task; do it quickly and professionally to maintain company morale and productivity.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

When terminating an employee, communicate clearly and directly without making excuses or apologies.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

Pay all wages and accrued vacation immediately upon termination, as this is a legal requirement.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

Cut off access to company systems immediately after termination to protect sensitive information.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

If a terminated employee has invested shares, repurchase them promptly to avoid complications.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

Effective startup founders handle employee terminations well, which is a hallmark of professionalism.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

Keep your startup organized by following standard practices, understanding equity ownership, and ensuring all IP is assigned to the company.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

Founders should know key metrics like cash position and burn rate to communicate effectively with investors.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

When searching for an accountant, consider recommendations from those familiar with startups, as they understand the unique challenges involved.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

Use online services for incorporation to save costs; hiring a lawyer is only necessary for complex legal matters.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

For fundraising, standard documents can often be used without legal counsel, saving on legal fees.

YC

Y Combinator Cast

04/28/17

@ Y Combinator

Working with cryptocurrencies can be complex, and banks may struggle to accommodate companies in this space due to regulatory uncertainties.

Legal and Accounting Basics for Startups with Kirsty Nathoo and Carolynn Levy (HtSaS 2014: 18)

Takeaways