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Startup Mechanics - Kirsty Nathoo, Partner and CFO at Y Combinator - Stanford CS183F

Stanford Online2017-04-10
startup#fundraising#Stanford#startup mechanics#Y Combinator#SOE#Computer Science#Kirsty Nathoo
91K views|7 years ago
💫 Short Summary

Kirsty Nathoo from Y Combinator explains the startup mechanics of forming a C-corp for success and fundraising, emphasizing standard processes and incorporation in Delaware. She discusses equity distribution, vesting, and the importance of 83b elections. The video also covers pre-money and post-money valuations, SAFE agreements, fundraising with SAFEs, and employee compensation with equity. The importance of transparent communication, financial literacy, and understanding preferred shares is highlighted, along with the significance of motivating employees through equity incentives.

✨ Highlights
📊 Transcript
Importance of Establishing a Separate Legal Entity for Startup Success.
00:41
Starting with a C-corp is crucial for growth, fundraising, and success rather than beginning with an LLC and needing to convert later.
Sticking to standard processes and avoiding unnecessary complexities is essential to prevent future issues.
The session covers the life cycle of a company, including company formation, raising money, and hiring employees.
Benefits of incorporating a C-corp include avoiding unnecessary admin and liabilities.
06:32
Factors such as creating intellectual property, charging for products, and protecting assets indicate when incorporation is beneficial.
Incorporating in the US, particularly in Delaware, is recommended due to well-developed laws, investor expectations, flexibility in issuing shares, and privacy protections.
It is advised to follow the trend and incorporate in Delaware, even as non-US citizens or while not physically present in the US.
Process of Incorporating a Company in Delaware.
08:23
Fax forms to Delaware to create entity, adopt company bylaws, appoint directors and officers, assign IP, and distribute shares.
Hiring a lawyer for incorporation can cost $3,000 to $5,000 plus filing fees.
Recommended to use valley lawyers and start with a Delaware C corp to avoid costly mistakes.
Young startups can use Clerky, a platform simplifying creation of formation documents with e-signatures and document storage.
Importance of Fairness in Equity Distribution for Co-Founders
12:40
Equity distribution discussions among founders are crucial for the company's success and should be approached with fairness in mind.
Splitting equity evenly among co-founders can help maintain a harmonious working relationship and prevent disputes.
Founders should prioritize the future potential of the company over past contributions when determining equity distribution.
Equity distribution should be seen as a long-term commitment, recognizing that success is a collective effort.
Importance of Equity Allocation in Startups
16:23
Consider having one co-founder with slightly more shares to prevent deadlock.
Equity allocation should be forward-looking, not just based on past contributions.
Proper paperwork and legal ownership of shares are crucial to avoid potential issues.
Stock purchase agreements involve buying shares for cash or IP.
Importance of Vesting in Ownership of Shares
20:06
Vesting involves earning permanent ownership of shares over a four-year period with a one-year cliff, ensuring gradual full ownership and protecting founders.
Without vesting, founders risk losing value if co-founders leave early or if the company is acquired.
Investors value vesting as it aligns incentives and ensures founders are committed to the company's success.
Vesting sets a precedent for future employees, emphasizing the importance of long-term commitment and dedication.
Importance of filing an 83b election during the incorporation process.
24:34
Failure to file can result in significant tax consequences and potential deal failures during acquisitions or funding rounds.
The 83b election must be filed with the IRS within 30 days and proof of mailing should be retained.
Following instructions from legal professionals or services like Clerky is crucial to ensure compliance and avoid complications.
Understanding pre-money and post-money valuation in startup funding.
27:46
Investors calculate share price based on company valuation before and after investment.
Introduction of SAFE for unpriced rounds, allowing investors to receive future shares at a predetermined valuation cap.
Discussion on the complexities of share ownership and the importance of legal assistance in funding negotiations.
Key highlights of SAFE investment:
33:53
SAFE holders pay half the price per share compared to series A investors, receiving double the number of shares for their early investment.
The cap table includes SAFE investors who own the same class of shares, ensuring fairness in ownership.
Discounts on SAFE investments typically have a cap, and the practice of cherry-picking discounts and caps is discouraged.
Dilution is inevitable as the company grows, emphasizing the importance of wealth creation for both founders and investors.
Fundraising with SAFEs through Clerky is simplified with standard YC templates for investor details and bank wire instructions.
35:33
It is important to ensure that investors send the money to the company.
Legal documents like the board consent are necessary even with a safe agreement.
Hiring employees involves understanding laws and regulations, deciding roles, and differentiating between contractors and employees in terms of IP assignment and work characteristics.
Employees tend to use company equipment and work hours, while contractors have more autonomy and can work remotely without work authorization.
Contract workers receive milestone-based payments and a form 1099, while employees have taxes withheld by the company.
39:14
Paying employees across different states can be complex, so using a payroll service provider like Gusto is recommended.
It is important to ensure employees are paid minimum wage and provided with equity as part of their compensation package to motivate them to contribute to the company's success.
Importance of motivating employees through equity and stock options.
43:12
Suggestion to allocate around 10% of the company to the first ten employees.
Vesting agreements protect the company in case employees are fired.
Benefits for employees highlighted in the process of issuing shares or options through a stock plan.
Communication about equity and company ownership percentage is crucial.
Key Highlights on Investor Money Management in Companies.
46:25
Emphasize the importance of transparency and responsibility with company finances to maintain investor trust.
Ensure that investor money is spent wisely on activities that increase company success, not personal indulgences.
Plan ahead for employee equity distribution to avoid running out of shares.
Compensating employees with equity is ideal for startups focused on rapid growth and value creation.
Contrasting for-profit and non-profit companies in terms of ownership, compensation, fundraising, and equity distribution.
50:35
Subsequent fundraising rounds dilute existing shareholders, including founders and employees, proportionally.
Educating employees on potential changes in share value over time is crucial.
Exploring the differences between preferred shares and common shares, emphasizing preferred shareholders' rights and preferences.
Preferred shareholders have rights such as liquidation preferences and voting rights.
Importance of Transparent Communication in Company Finances
54:11
Founders must understand concepts like vesting and options to effectively educate employees.
Dilution of employee shares varies based on funding rounds and company lifecycle.
Safe notes typically convert into preference shares for investor rights.
Vesting schedules can range from monthly to five years, with longer timelines posing challenges in employee retention.
Conversion of Preferred Shares in Fundraising.
57:29
Preferred shares can be converted into common shares during exits and proceeds in fundraising.
Founder's preferred shares were also discussed in the context of conversion.
The speaker thanked the audience for listening to the discussion.