00:00I would like to introduce my colleague
00:02carolyn levy to my right here who's
00:06going to talk about startup mechanics
00:08and then with john levy and jason quan
00:11they'll answer some questions about
00:14getting your startup started legal
00:16issues i will point out that these three
00:19folks are probably the finest legal
00:24minds in the startup world these and i
00:27and i do not exaggerate they may hate me
00:29saying it but these folks have seen more
00:31they've worked with more startups in
00:34more situations than you could believe
00:36and some of the situations you wouldn't
00:39believe so they know everything and so i
00:41do hope you listen carefully and I do
00:43hope look I know we gave you Eve
00:45everyone homework to watch videos from
00:51from 2014 in 2017 on startup mechanics I
00:56urge you all to watch those videos if
00:59you haven't already as as an adjunct to
01:03what Carolyn and and John and Jason are
01:06about to say because you will find them
01:08useful as you build your company so
01:10Carolyn thank you Jeff totally
01:18exaggerated but we have seen a lot of
01:20stuff okay so like Jeff just mentioned
01:26back in 2014 Kirstie and I did a
01:29start-up school lecture on legal and
01:31accounting mechanics and we were hoping
01:33that most of you would have time to
01:35watch that before you came here today
01:38I'm going to blaze through a recap of
01:41that and just touch on the key takeaways
01:44from not lecture but I am gonna skip the
01:47part about investors and fundraising
01:49because Kirstie is actually gonna do an
01:50entirely separate lecture on that stuff
01:52later on in the program next I'm going
01:57to go through some common mistakes and
01:59problems that we see founders make and
02:00finally Jason and John are gonna come up
02:04here and I want to thank all of you who
02:06sent in email questions to us beforehand
02:09because we're gonna go through some of
02:11those on the some of
02:12legal mechanics questions that you guys
02:14already submitted okay
02:18so um the first thing you have to do
02:20when you're starting a start-up is
02:21actually form your separate legal entity
02:23this is your company and the act of
02:27incorporating is just filing a document
02:29called a certificate of incorporation
02:31which is really short and simple for
02:34startups and you go and you file it with
02:37the Department of corporations in
02:38whatever state you choose to incorporate
02:40in now we strongly recommend choosing
02:43Delaware because the process in that
02:46state is really really easy and the
02:48service is really fast and efficient and
02:50that's the primary reason we suggest but
02:53also as a lot of you probably know you
02:55know most public companies are Delaware
02:57companies so that saves you a little
02:58time if your gonna go public and some
03:02investors actually will require that
03:03you're in Delaware before they before
03:05they'll fund you so that's another good
03:07reason to ban Delaware okay so this has
03:11been mentioned a couple times already
03:13we also strongly recommend that you use
03:16an online platform specifically geared
03:18to startups to incorporate and there's a
03:21lot of these platforms some are good
03:23some are not so good Clerke and stripe
03:26outlets have already been mentioned and
03:28those are the two that we think are
03:29great they're YC companies we have
03:32extensive experience with Clerke and I
03:34was really happy to hear that Darby Wong
03:36one of the founders of Clerke is gonna
03:37do an AMA because he's great one of the
03:42reasons why we think clerking stripe
03:44outlets are so great is because they
03:47don't stop after formation they also
03:49have post incorporation documents and
03:52some of the not so good platforms stop
03:55after formation and they don't do post
03:57incorporation and one of the things that
04:01doesn't happen if you don't do post
04:03incorporation is founders don't buy
04:04their stock and when we were commuting
04:08down here today Jason reminded me of a
04:10story a really big company and a really
04:14big law firm and they didn't the
04:16founders never bought their stock and
04:18this wasn't discovered until the Series
04:20B financing so if you think this sounds
04:22weird like of course the founders need
04:24to buy stock look this is a mistake that
04:25happens okay another step in the
04:30incorporation process is forming a Board
04:32of Directors and for early startups the
04:34members of the board are usually the
04:36founders if you're a solo founder you
04:38can have a board of one if you are two
04:40founders you can have a board of two um
04:43there's a misconception that board of
04:46directors have to have an odd number of
04:48Directors but that is not necessary and
04:50then you need to appoint corporate
04:53officers you need to have a president
04:56and/or a CEO you can't have both if you
04:58want and in Delaware you're required to
05:01have a corporate secretary and another
05:04part of the process is adopting
05:05corporate bylaws for start-ups bylaws
05:08can be extremely generic and finally
05:13this isn't technically part of the
05:16incorporation process but I encourage
05:18you to open a corporate bank account as
05:21most startups won't have very much cash
05:23to put in that bank account but it's
05:26great to get into the habit of treating
05:28the corporation as a separate entity as
05:30early as possible and I it's critical to
05:33form good habits around the way you
05:35treat your company's money okay so post
05:42incorporation so now we're gonna go back
05:43to what I just said about issuing
05:45founders stock you all know that
05:46corporations are owned by stockholders
05:48and you and your co-founders are going
05:50to be the first stockholders okay if you
05:55are a founder team of two or more you
05:57have to think about how you're going to
05:58allocate that stock our belief about the
06:01best way to allocate stock among
06:03founders is to think about the challenge
06:04of execution and that's another way of
06:07saying the following do not place too
06:09much importance on the founder that had
06:11the idea for the business because all of
06:14the hard work is in front of the team
06:15and all of the value is going to be
06:17created in the future if you are all
06:21going to be working hard going forward
06:23but you all are we think the equity
06:26split should be more or less equal among
06:27you if you and your co-founders are
06:30having a really hard time coming to a
06:32consensus about stock allocation there
06:34may be underlying trust or commitment
06:37issues with the team so you want to pay
06:39attention to that okay founders need to
06:45purchase their shares from the company
06:46and you buy them using a stock purchase
06:49agreement you actually have to pay for
06:51them but fortunately the stock of a
06:52brand-new company is very cheap the way
06:55most founders stock purchase agreements
06:57work is that you give a very very small
06:59amount of cash and then you contribute
07:01to the company any intellectual property
07:03that you've created so that's the total
07:05purchase price for your founder shares
07:11founders shares should be subject to
07:13vesting and this bet ties back to the
07:16point I just made about all the work
07:18being ahead of you vesting means that
07:20you don't get full ownership of your
07:22stock until a certain period of time has
07:24passed during the voting during the
07:27vesting period whether you can vote all
07:28of your shares but if you quit your
07:30company before the full period of time
07:33the company will automatic automatically
07:36repurchase all of your unvested shares
07:38when shares are subject to vesting
07:40they're called restricted stock so your
07:43founder stock purchase agreement will be
07:44actually a restricted stock purchase
07:46agreement and as I'm sure most of you
07:49know the standard or typical vesting
07:51period is about four years so I'm not
07:56gonna get into cap tables in this
07:57lecture because Kirsty
07:59is going to explain them in detail in
08:01her lecture about fundraising mechanics
08:03but the basic idea is that every company
08:06absolutely needs to keep a cap table you
08:09need to keep a record of every single
08:10share of stock that your company issues
08:13and we used to have to do these on these
08:15complicated Excel spreadsheets but
08:16fortunately there are now multiple
08:19online platforms that will keep track of
08:21stock ownership you know effortlessly
08:24and we'll make sure that those resources
08:26are included on you know on one of these
08:28on on the forum okay because founders
08:34tend to identify so closely with their
08:36startup it's easy to forget that they
08:37actually need to be employees of their
08:39company we're look at that so it's
08:44pretty self-evident that most founders
08:46can't pay themselves in the early days
08:48of their startup because practically if
08:49there's no money you can't have payroll
08:51but if there is enough money
08:53it's a really good idea for founder's to
08:55pay themselves minimum wage strictly
08:58speaking it's against the law not to pay
09:00yourselves although obviously this isn't
09:01a thing that that gets enforced okay um
09:08so employment whether a founders or
09:12others does not require an employment
09:14agreement employment agreements are
09:16actually are not actually appropriate
09:18for startups because employment is at
09:20will by default and the basics of hiring
09:24and firing are governed by law anyway
09:27in fact employment agreements can
09:29sometimes complicate things because
09:31courts may interpret certain of the
09:33language an employment agreement as
09:34changing that default at-will status to
09:37a for-cause status which makes it a lot
09:40harder to terminate people so an
09:42employee agreement is only necessary if
09:45you're hiring employee who's going to
09:46have something special like a severance
09:48package and we really don't see those in
09:51startups but what is really really
09:53important is that all the founders and
09:55in the future you know everyone who
09:57works for your company has signed a C
10:01III a or a PII a and I'm sure a lot of
10:04you heard of these it's a confidential
10:05or proprietary information invention
10:08assignment agreement agreement the CI ia
10:12protects the company's confidential
10:14information and trade secrets and
10:15ensures that all the intellectual
10:17property that is because created is
10:19owned by the company so you want
10:21everyone in the company signed up to one
10:23of these very early-stage startups
10:27usually cannot afford to have employees
10:29but the solution is not to convince
10:32people to work for your company for free
10:34it's one thing for founders to work for
10:36free but it's significantly riskier for
10:38non founders creating work product and
10:41other intellectual property to work for
10:44so unfortunately all of you all have to
10:46do all the work until you can afford to
10:48hire up so I'm gonna wrap up this
10:53summary and digress from legal mechanics
10:55for to make a few common sense points
10:58and my belief my personal belief is that
10:59ignoring these points can cause you to
11:01waste a lot of time fixing problems
11:03later these are really common mistakes
11:07so ideally you will have opened a
11:09corporate bank account as part of or
11:11right after incorporating the company
11:13hopefully you have a little bit of money
11:14in it so you should use that for all of
11:18your company expenses if the company
11:21bank account has no money in it and you
11:23are paying for all the business expenses
11:25with your own personal savings the
11:27company can reimburse you later when it
11:29eventually has money but you absolutely
11:31need to keep all the receipts and you
11:33need to document everything carefully
11:37corporations have to pay taxes if your
11:40startup is a Delaware corporation there
11:42is an annual tax you have to pay to that
11:44state but if you calculate it correctly
11:47the tax owed is really minor for
11:49startups corporations also have to pay
11:52Corp they also have to file a corporate
11:54tax return with the IRS
11:56obviously when your company's just
11:57getting started you're not going to
11:58actually owe they are as any taxes but
12:00you still have to file the return and if
12:03your startup does have employees even if
12:05it's just the founders getting minimum
12:07wage you need to pay payroll taxes and
12:09the best way to do this is to get set up
12:11with an online payroll service of which
12:13there are many oh this is a personal
12:18favorite of mine so you need to find a
12:21good place to store the company's legal
12:23documents like the certificate of
12:25incorporation the bylaws the CI IAS the
12:28founder stock restrictions agreements
12:30founders stock purchase agreements for
12:33example a shared Dropbox folder is a
12:35good idea do not store them in a
12:37co-founders email because you do not
12:40want one person to control the access to
12:42these very important documents also make
12:44sure that the legal documents that you
12:46are carefully collecting and storing are
12:48actually the signed and dated versions
12:50and triple check to make sure that there
12:53are every blank is signed by every party
12:55that needs to sign it later when your
12:58company is fundraising and investors are
13:00doing due diligence on your company it
13:02just looks really amateur when you serve
13:04up a bunch of formation documents and
13:05there's a bunch of blanks in them all
13:09right so that's the summary of that oh
13:13sorry one more thing I just wanted to
13:17mention what is acting like a real
13:19company and my opinion is that
13:21acting if you treat your startup like a
13:23board of directors governed taxpaying
13:27founder employee confidential
13:29information holding entity that that's
13:32the way to act like a real company and
13:34this is also the only way you're going
13:35to get protection from personal
13:37liability which is the whole point of
13:40supporting a separate legal entity
13:44now we're going to move on to common
13:45mistakes and problems okay I don't know
13:50when to form a corporation so this isn't
13:53actually a problem or a mistake I just
13:55wanted to talk about it here and it
13:57turns out that a lot of you emailed us
13:59this question so the right timing on
14:02when to pull the trigger on
14:03incorporating is going to actually be
14:05different for every startup but in
14:07general we believe in doing it sooner
14:09rather than later and so my top four
14:12reasons about why you want to do this
14:14would be number one because forming a
14:17corporation protects you and your
14:18co-founders from personal liability for
14:20your company's actions number two the
14:24Corp you know the corporation is the
14:26correct repository for all of the
14:28intellectual property that you and your
14:30co-founders are creating otherwise
14:32you're all just working on a project the
14:34separate pieces of which are owned by
14:36individuals and to me that's a hackathon
14:38not a corporation number three you can't
14:41raise you all know this you can't raise
14:43real money for your startup without
14:45forming corporation first because your
14:47mom might give you some money for your
14:49startup but no professional investor is
14:51going to wire money to your personal
14:55and you need to have a corporation in
14:57order to have payroll and you can't
15:00enter into contracts or with you know
15:02vendors or consultants or potential
15:05customers but personally and if you try
15:07to do these things that is individual
15:08it's super messy I formed an LLC instead
15:15of a corporation because I got advice
15:17that LLC's are better for taxes so for
15:21our purposes this is usually a mistake
15:23because even though LLC's are better for
15:27optimizing taxes the vast majority of
15:30angels and VC firms will not invest in
15:34if you plan to fundraise from people
15:36other than a small group of your friends
15:38and family your startup needs to be a
15:40corporation the question that several of
15:43you asked in the emails is whether there
15:45are other reasons besides fundraising
15:47considerations to form a corporation
15:49instead of an LLC and so in other words
15:51if you're not planning to fundraise for
15:53a long time after starting your company
15:54does it make sense to start out as an
15:57LLC and then switch to a corporation
15:59later and in my opinion my opinion the
16:02answer is no because I don't believe the
16:04tax benefits of an LLC are compelling
16:07enough to outweigh the inconvenience of
16:09converting your LLC into a corporation
16:12later and for those of you who watched
16:14the 2014 startup school lecture kirstine
16:17I told an anecdote about a company that
16:20was an LLC and they had to convert into
16:22a Delaware corporal nightmare it's
16:28obviously an outlier but we do see this
16:30a lot at YC we see a lot of LLC to
16:32corporate conversions and it's um it's
16:35just kind of a headache
16:35you don't need okay I'm thinking about
16:40hiring a lawyer to incorporate my
16:42company so this is usually not a mistake
16:46if your startup is really complicated
16:48for some reason or if you've already
16:50formed a non-us entity and you now want
16:53to come to United States and raise money
16:55in these cases you probably do need to
16:57get a lawyer but I'm sure all of you
16:59know lawyers are very expensive so save
17:02money and use one of the good online
17:04platforms that we just talked about firm
17:06corporation also realize that lawyers
17:09who are free like family members doing
17:11you a favor may not be actually as good
17:13as the online platforms because they
17:15don't specialize in corporate
17:17transactional work so your Aunt Sally
17:20who does personal injury may mean well
17:22but Clerke and stripe outlets will do a
17:25much better job I'm starting to startup
17:30but I still have a full-time job this is
17:32actually already come up today a common
17:34problem for founders because it's a big
17:36decision to ditch the security of a
17:38salary I think some of the other
17:40speakers in this course will talk about
17:43sort of the psychology of taking that
17:44plunge but if you've decided to work on
17:48your spare time the primary legal
17:50consideration is just keeping everything
17:52separate so in California for example if
17:55you're working on your startup on your
17:56own time with your own resource
17:58resources your current employer should
18:00have no claim on your new business idea
18:03so use a different computer don't work
18:06on it during business hours but keep in
18:09mind that different states and even
18:11different countries have very different
18:12rules about this particular issue and
18:14there's things like non-compete
18:16non-compete agreements with your
18:18employer that may come into play so if
18:21you're gonna do this you really should
18:22do a little bit of research first or get
18:25legal help our founding team has been
18:28working on this idea for years so we
18:30don't need vesting on our founder shares
18:32this is a broken record we hear this all
18:34the time this is a big mistake if you
18:37don't have vesting you are setting your
18:39company up for future problems no
18:42investor wants to put money into a
18:43company with founders who may decide the
18:45next day that their burned out so they
18:47take their shares and they leave but the
18:49more common scenario is that one member
18:51of a family founding team decides that
18:54he or she is burned out and so leaves
18:57the company with a giant ownership stake
18:59the remaining founders have to do all
19:01the work but someone who's not doing any
19:03work has the same ownership it is
19:06painful to fix this problem because the
19:08price of the company's stock may have
19:10increased in the interim and it becomes
19:12really expensive for the remaining
19:14founders to allocate the share ownership
19:16fairly how many of you how many of you
19:21are single founders I'm just curious
19:23quite a few okay okay so I'm a single
19:27founder and I don't need vesting you may
19:29be thinking I think this is also a
19:31mistake single founders obviously don't
19:34have the same problems that founder
19:35teams do but no vesting is still
19:38unattractive to investors for the same
19:40reasons also you will eventually hire
19:43employees and probably grant them stock
19:45options and those stock options will
19:47have vesting and it just is a lot better
19:49when you lead by example all right
19:55another personal favorite I signed a
19:58legal document but I was too busy to
20:00read it so I have no idea what it is
20:01this happens a lot if this is a big
20:04mistake we see founders do this all the
20:06time and I mean we sympathize right the
20:08legal mechanics of your startup are the
20:11really boring parts of the process you
20:15can get away with not reading every word
20:16of your bylaws for example but you need
20:19to understand every provision in your
20:21founder stock purchase agreement you
20:23actually don't want to have anything
20:25happen with your company's stock that
20:27you don't know every word of and this is
20:30actually a bigger problem it's not this
20:32isn't such a huge problem with formation
20:34documents it's a big problem with
20:35fundraising documents I can't tell you
20:38how many founders have told me they
20:39won't read a five-page safe so you want
20:43to get into the habit now of reading all
20:45of your company documents it's daunting
20:46it's legalese whatever read it anyway
20:49understand it it's a great habit to get
20:52into and then you'll know if it isn't
20:54signed okay my friend offered to work
21:00for my startup for free so I'm going to
21:02pay her with shares generally this is a
21:05mistake because people who work for your
21:07company need to be paid money obviously
21:10compensation packages can include an
21:12equity component but paying with only
21:14stock is not a good idea the exception
21:18is if your friend can be hired by your
21:20company as a consultant or independent
21:22contractor those are the same thing and
21:24it's okay for consultants to be paid for
21:26services with just stock but you have to
21:29first get comfortable that your friend
21:31is properly classified as an independent
21:33contractor and the rules in California
21:36about this just changed and got stricter
21:38also you'll want to make sure you paper
21:41this relationship with a good consulting
21:43agreement because you really want to
21:44make sure that the company owns all of
21:46the consultants work product you don't
21:52okay this is a big one my co-founder and
21:53I don't want to work together anymore
21:55so this is sometimes a small problem and
21:59this is sometimes a fatal problem
22:01startups die sometimes because of this
22:04and it happens unfortunately a lot and
22:06it can be overwhelming
22:08the acrimonious it's kind of like
22:10watching people get a divorce
22:12so the reason to pay careful attention
22:14to the points I've already mentioned
22:16like paying yourselves having vesting on
22:18your founders shares having a CII a that
22:22clearly demonstrates that the company
22:23owns all the IP that's created doing
22:26these things can significantly decrease
22:28the legal drama around breakups I don't
22:31know what decreases the emotional drama
22:32but that decreases the legal drama my
22:37company has some employees and I promise
22:39to issue them stock this isn't a problem
22:42as long as you take action on it sooner
22:44rather than later and the appropriate
22:46action to take is to adopt a stock
22:48incentive plan and to grant stock to
22:51these early employees a stock plan as
22:54some of you probably know is like a 15
22:55to 20 page document it references a
22:58specific number of shares of your
23:00company's common stock that are
23:01allocated to the plan the company can
23:04issue restricted stock or stock options
23:06pursuant to the plan but what you need
23:08to know about stock options is that if
23:10you grant stock options you have to get
23:12something called a 409a valuation and
23:16most startups don't want to do this
23:17until after they've had a fundraising
23:19event so you can issue restricted stock
23:22to employees under this plan and they
23:25will also have vesting and they come
23:28with a whole host of tax and securities
23:30rules which is why the plan needs to be
23:3120 plus pages long but the reason to not
23:35wait too long to do this is because the
23:36longer you wait the more expensive your
23:38stock will get and so you want to grant
23:40yours you want to give your employees
23:41cheap stock or as cheap as you can
23:44because expensive stock is not very
23:46incentivizing I got a cease and desist
23:51letter another company says my company
23:53is infringing on its trademark this is a
23:56problem an early-stage startup it really
23:58doesn't need but we actually see it
23:59happen fairly often founders get very
24:03attached to names and once this happens
24:05it's really tough to let go but your
24:08company is probably too young to have
24:09created much value in the name you
24:12picked and the expense and distraction
24:14of getting into a trademark dispute with
24:16a more established better funded company
24:18can be substantial so your best course
24:22it go let the name go pick a new name
24:26and get back to work related to this a
24:29few of you emailed the question about
24:30whether or not it's worth it to register
24:32your company's name and get the official
24:34trademark generally we consider a
24:36trademark registration to be something
24:38that can wait it's a nice to have and
24:40not a need to have in the early days of
24:42your startup all right finally I picked
24:47an awesome name for my company but I
24:49have to pay 10k to get the domain this
24:51happens a lot so again don't fall in
24:53love with the name that may cause you to
24:55make bad decisions no matter how great
24:58that name is it is a bad decision to
25:01waste time getting into a lawsuit with a
25:03company that claims you stole its
25:04trademark and it is usually also a bad
25:06decision to spend a ton of money on a
25:09domain so do your research on names like
25:12restric don't just research the PTO
25:14research it and then do whatever is
25:16cheapest and most efficient and move on
25:19okay that's it so now we're gonna have
25:23John and Jason come up and we okay so
25:26what we did is we took you guys emailed
25:28us a bunch of questions and we pulled we
25:31pulled some out we edited them them a
25:33little bit for brevity but we mostly
25:35kept them sort of unfiltered original
25:37style so we're going to go through a
25:41okay Jason I'm gonna ask you the first
25:44question when you're ready good okay
25:48when does the 30-day IRS clock for
25:51filing an 83-b election start and you
25:53might wanted to start by describing what
25:55an 83-b election form is in case some of
25:57the new here doesn't know yes so to 83-b
25:59election is a tax election so when you
26:01buy stock if you don't make an election
26:04- what happens is you're taxed on the
26:06so each vesting period whichever the
26:10amount of stock that that's whatever the
26:11value of the stock is at that time you
26:13incur an income tax it for that but in
26:1583-b election allows you to be taxed on
26:17the difference between the value of the
26:19stock and the the price that you pay for
26:22the stock on the day that you actually
26:24buy the stock so it's actually by
26:27default in most cases the best thing to
26:29do if when you are start-up founder is
26:31to actually make the election so that
26:32you know because you're gonna be paying
26:34a very nominal price for your founder
26:36stock and so there's going to be no
26:38income taxes because you're going to be
26:39you know if you make the election
26:41because you're gonna be paying the same
26:42amount so you'll pay like a dollar for
26:44your stock and then basically say the
26:46stock is worth a dollar and then you
26:47make the 83-b election and then there
26:49are no more taxes that are going to
26:50accrue on your vesting as a stock grows
26:52and value so if you don't do that which
26:54does happen from time to time you can be
26:56faced with a a very large tax liability
26:59if your company ends up becoming very
27:00very valuable as your stock vests and
27:02the time period from when the 83 below
27:04should be election the 30-day period
27:06that you have to make the filing it
27:08starts from the day that you actually
27:09buy the stock so that is a hard deadline
27:12it includes calendar days it's not a
27:15business day period and if you miss it
27:18there's really not much you can do about
27:20it there are some sort of things that
27:22you can do to mitigate the tax liability
27:24that when if you work with tax lawyers
27:25but if you miss it it's some it can be
27:27pretty bad so that's one thing they
27:29definitely remember okay and I will add
27:31that this is a good reason to pay really
27:33careful attention to the date on your
27:35restricted stock purchase agreement and
27:37the and it should be the same date that
27:38you write the check for the one dollar
27:41paint you just pay attention to that
27:43like you want that all happening on the
27:45same time so you're not really worried
27:47about like oh my gosh what's my actual
27:48start date and the other thing I'll say
27:50about that is 83-b election forms need
27:53to be saved by the company as well so
27:55the individual founder is gonna save
27:57that election form for their own tax
27:59returns and their own files but the
28:01company needs to keep a copy - you put
28:04that in your shared Dropbox you make
28:06sure it's signed you make sure it's
28:07dated and you save it in that safe place
28:09and the company has it you know forever
28:11that's a really important it's one of
28:13the few things that can't be fixed
28:15that's also an important well yeah I
28:17mean Jason was just saying like there
28:18are some there are some fixes sometimes
28:21but they're painful and really expensive
28:23and people look at it in diligence this
28:25is actually one of the few things to
28:26remember yeah if you remember nothing
28:28else from this file you're 83-b election
28:30forms okay so we also got a lot of
28:33questions that touched on a variety of
28:35immigration issues so and here's a
28:38here's a sample question we got I'm in
28:41Canada can you help me get a TN visa so
28:43I can work on my startup in the US Sean
28:46wanted to take a crack at that this is a
28:48difficult you know Jeff said we know
28:51everything but immigrations not
28:53something that were experts on and this
28:56is a situation where you need to speak
28:58to an expert especially if you have
29:01situations where are you going to be you
29:03need to be employed as Caroline was
29:05saying earlier by your company and if
29:08you can't work in the US you can't be
29:10employed because it's illegal and you
29:12better off speaking to an expert now
29:14immigration is particularly tricky you
29:17know it's a political issue obviously
29:18now so it's the landscapes always
29:21changing but it's also it's more of an
29:24art than a science so it's always been
29:26very difficult for us jumping in knowing
29:28the basics to talk about immigration
29:30we're really not experts in this area
29:32and you definitely need to speak to an
29:37um Jason should I be a c-corp or an
29:39escort c-corp so if you just file in
29:43Delaware you're trying a c-corp by
29:44default in order to actually be an
29:46escort you have to make an election on a
29:47tax form and the difference between the
29:50two of the C corporis corporate escort
29:52was passed through taxation says tax
29:53transparent so any income earned by the
29:56corporation is then passed through to
29:57its owners the C Corp cuts off the
29:59income with the level of the corporation
30:00and corporation that pays taxes and so
30:02the reason why you want to be a sequel
30:05is that's the kind of entity that
30:06investors are used to investing
30:08and II also when you actually take
30:10investment from outside investors it
30:13will blow the S corp election most of
30:15the time anyway okay John how much
30:20equity should we save for our first
30:22employees our key hires during the
30:24incorporation of the company it depends
30:27on the size of the company and how many
30:29people you need to hire I would say you
30:32know the standards are probably 10 to 20
30:35percent people think is going to be you
30:37know saved for employees but it's
30:39definitely specific to the company so I
30:42would you know this is a situation where
30:45it's very easy for me to say hey you
30:47should be very generous with your
30:49employees and and you know have a
30:52lineman and make sure they're benefiting
30:54from the upside and the company it is
30:56something I believe very strongly and
30:58especially if you have good employees
31:00you want to keep them you want them
31:02aligned with your mission so it's worth
31:04you know thinking about this in a
31:07long-term view having the long-term view
31:09and and you know setting up everyone for
31:12success the online platforms Clerke and
31:16stripe Ellis well I know Clerke for sure
31:18has you can actually create a stop out
31:21option pull at formation if you want to
31:23so if you've already thought that far
31:25ahead and you know you want to have a
31:27plan set up you can do that up formation
31:28I would say though the vast majority of
31:30companies actually wait and don't adopt
31:32a stock option plan so they're a little
31:34further along Jason is it illegal to
31:38have unpaid interns generally yes so you
31:41just went over this in the fundamentals
31:42so you want to avoid unpaid employees
31:45interns are going to be generally
31:46considered employees and then there are
31:48some exceptions you can you can use or
31:50take advantage of for giving people on
31:53you know sort of college credit if
31:55they're college interns or things like
31:57that but you know that's going to take
31:59some work on your part to actually learn
32:00those rules in your project you need to
32:02talk to a lawyer for those things and if
32:04you want to get people the help of
32:07people and you know just pay them in
32:09from in the form of equity again you
32:11know that was already covered by
32:12Carolyn's presentation it could be
32:14contractors but there are standards for
32:16when somebody is classified as a
32:17contractor versus an employee and those
32:19standards got just recently Mort
32:21are harder to to satisfy given some of
32:24the California Supreme Court rulings you
32:27know YC company ones that have fourteen
32:28interns fourteen unpaid interns that was
32:31a big mess okay John there's a ton of
32:35advice out there for how to properly
32:37structure for a non-profit for a
32:39for-profit startup what about nonprofits
32:42what's the best legal practices for
32:43starting a non-profit startup I'm
32:47getting all the questions that I can't
32:49answer it seems fair
32:51the but nonprofits are also completely
32:54different it's a different animal it's
32:57it's different from for profits I mean
32:59the government doesn't favor nonprofits
33:02because the government likes to get
33:03taxes nonprofits are tax free so if you
33:06think about it's going the government's
33:08going to make it difficult to become a
33:10non-profit do you have to go through all
33:12these steps and fill out forms it takes
33:15like nine months I'm not an expert on it
33:17YC is not an expert on it we do we do
33:21donate to nonprofits we accept
33:23nonprofits in our in our program that
33:27said it's always been you have to have a
33:29public your company has to be set up for
33:32the public good there are certain
33:34disclosures you need to make you have to
33:36disclose the top five salaries in the
33:38nonprofit and I'm certainly not an
33:39expert in this area so I don't want to
33:41touch it on on it anymore but it's it's
33:43a completely different animal you're out
33:49there soliciting donations from
33:50foundations rather than raising money
33:52from VCS so it is a totally different
33:54beast Jason can I invite a stranger to
33:57be a partner so that question probably
34:01answered itself generally you want to
34:04work with people that you can trust and
34:06know and so you know before you prey on
34:08somebody as a partner co-founder you you
34:11kind of want to understand how well
34:13you're going to work together whether
34:14you can actually build something
34:16together whether you're going to
34:17actually get along so I think the answer
34:21to that is not if you really want to
34:23make sure that you know you're going to
34:25be successful and even if this the
34:28person asked this question meant partner
34:30like advisor or some other not like a
34:34co-founder but they meant
34:35something else I wouldn't even I would
34:36say don't ever work with a stranger
34:38right and this goes back to what I was
34:40saying about founder breakups I mean
34:43that is that's a recipe for disaster to
34:45work with someone you've only just met
34:47because we've seen brothers break up
34:50like the founder breakup goes through
34:53all levels of relationships so you're
34:55gonna stack the deck against yourself if
34:57you have a stranger involved John what
35:00are key factors to consider while
35:02determining what country should want to
35:05register their parents company in the
35:13quick answer is where where's your
35:15market was your business who were you
35:17you know most people set up in the US
35:20because they're attacking the US market
35:22which is a big market if you're selling
35:24something in India you should be in
35:25India most likely the problem with this
35:29question like the parent-subsidiary
35:31question to me I always think like when
35:33I'm talking to startups keep it simple
35:36like get you know this lecture seems a
35:40little dry and it's a little you know
35:42it's the legal mechanics not the most
35:43exciting thing but it's really pretty
35:45simple if you think about it's like hey
35:47you know form your corporation keep the
35:50be serious keep you documents like don't
35:52have one person in squirrel it away buy
35:55your stock from the company never forget
35:57your 83-b that's the one thing I want to
35:58drill home you know after you buy your
36:02that's about it like there's not that
36:04much to do as long as you're serious
36:06with parent subsidiaries complexity when
36:08I hear that from from companies early on
36:11I just want to run you're gonna make it
36:14extra hard on yourself with that kind of
36:16Jason with the explosion of legal
36:19services tech it's possible I may not
36:22need traditional counsel until a
36:24sophisticated angel or institutional
36:27round when do you advise your companies
36:29to stop using these services and migrate
36:31to a traditional law firm
36:32how would you distribute the work
36:34between the two yeah so there there are
36:37a lot of good tools out there right now
36:38so you could use Clerke you can use
36:40stripe out low so you can get pretty far
36:41with them and you know I think when you
36:44get to the point where you're raising
36:45significant amounts of capital you
36:46definitely should get a lawyer
36:48and because a lot of the agreements are
36:49going to be custom and bespoke your
36:51there's going to be some negotiation
36:53when you're just incorporating and
36:55setting up those services we'll take
36:56care of it you could probably go without
36:58counsel you could certainly get counsel
37:00if you want especially going to do
37:01something a little bit more custom when
37:03you get to the point where you're
37:04issuing stock to employees you probably
37:06do want to get you know somebody
37:08involved just because there are some
37:10things that can go wrong if you don't do
37:11it things perfectly and you also don't
37:14want to be careless about having written
37:17promises for stock with various people
37:19so sometimes outside counsel there can
37:21be very helpful making sure you you're
37:23not out over your skis when you're
37:24talking about things like that with
37:26people so John this question is kind of
37:30similar to the one I just asked you so
37:32it's probably the same answer but you
37:33can reiterate from a legal perspective
37:35can i form a start-up and then sell it
37:38while having a full-time job if so what
37:41things should I consider I also think
37:44Jeff touching this earlier but this is
37:46this is kind of asking the impossible
37:49there's no way or I've never seen any
37:52company started part-time on weekends
37:56holidays you know become like a giant
37:59company maybe you know you can do that
38:00on a small scale but this is a you know
38:03we're asking you to start a company out
38:06of thin air and that is very difficult
38:09to grow a giant cut it this is an
38:11all-consuming full-time thing it's not
38:15like oh I'm going to do this as a hobby
38:18so I don't want to sound dismissive but
38:20I just think that's practically
38:21impossible I wouldn't even think that
38:23way like this isn't a part-time gig
38:27Jason our patents ever worth applying
38:30for so this is a this is sort of like oh
38:35that's good you could talk a very long
38:37time about patents and whether it's
38:39useful to or worthwhile applying for
38:41them that the short answer is so pets
38:43are useful for protecting your
38:44technology especially from competitions
38:46and copying your technology your
38:49technology matters if you're pursuing a
38:51software startup you know or tech and
38:54able to enter Internet company
38:55patents tend to matter less there's less
38:57protection under patent law for software
39:01so your success going to be determined
39:02not by their protectability of your
39:04property under law but rather your
39:06execution under the software if you're
39:08pursuing a life sciences startup they're
39:10duplication is actually easier for
39:12competitors to to you know execute on so
39:15patents tend to be more important and
39:17you know if you have questions about you
39:20know the specific things that you're
39:22doing technology wise and whether it
39:24falls into the weak patent or strong
39:26patent protection bucket
39:27you should definitely consult with a
39:29patent expert or a lawyer on that but
39:31the last part of this is that no company
39:34is you know sort of you know raised
39:37money purely on the strength of their
39:39patent portfolio it's always going to
39:41come down to you know you know or how
39:44good is the founding team you know can
39:45they execute on their vision you know
39:47the Pats are just one part of the puzzle
39:50John I'm thinking about setting up an
39:52advisory board and wonder if advisors
39:55should have equity in my experience
39:58advisory board some more non-us thing
40:03like non Silicon Valley thing maybe in
40:05Silicon Valley we see advisory boards
40:08for the life sciences companies you
40:11would see the you know academics and
40:13professors try to legitimize the the
40:17company as advisors and get a little
40:19stock but this is not something where
40:22you know it's not something we give
40:26stock to people we're with them with
40:30without thought it's more I think the
40:33best quote on advisors somebody said was
40:36like advisors are investors who want
40:39stock for free and that's kind of how I
40:42think about it like you know people
40:44should invest ideally instead of
40:47advising for free shares and I know this
40:50is in like a one-size but some
40:52situations like I was saying it's
40:55appropriate maybe a life sciences
40:56company and you can have consultants who
40:59get stock but it's mostly a situation I
41:02try to avoid Jason what have you seen
41:06founders do when they had to cut off and
41:08fire a co-founder who was a personal
41:13that has anybody here ever had a
41:15roommate who's been a friend it's kind
41:18of like that right so sometimes you know
41:20it's better to not do certain things
41:22with your friend so that you can stay
41:25friends and so if you have started a
41:27company with a friend of yours and it's
41:29not working out and it's oftentimes
41:31because you guys have different ideas
41:33about the direction that company should
41:34go in or somebody's working just a lot
41:36harder than the other person is it's
41:38usually better to just solve that
41:41problem or you know basically you know
41:43resolve that problem as soon as possible
41:45rather than letting it be something that
41:47you think or hope will work out over
41:48time and letting it fester because not
41:52only does it hurt the company it hurts
41:53the friendship too so it's it's
41:55generally better to kind of get to a
41:57quick resolution you know you don't want
41:59to stall on that no that's something I
42:02would add the biggest mistake we see is
42:04people delaying and thinking Oh things
42:07gonna work out and this is a friend
42:09things gonna change it's usually best
42:11that you just end the relationship it's
42:14now working and the startup relationship
42:16the startup reserve reserve different
42:19exactly okay John what is the best
42:23methodology for reviewing potential
42:26loopholes in your privacy policies in
42:28terms of service this is an area where
42:32if you're going to spend money early on
42:35and a lawyer and you have something
42:37that's it's tricky that's a sensitive
42:41startup topic it's worth spending money
42:44on a lawyer but there are excellent
42:47services for privacy policies and Terms
42:50of Service on the internet right now I
42:53you Bend as one and all the major law
42:55firms also have privacy policy
42:58generators but if there's something
43:00specific or I you bend it I'll send out
43:03on the resources tab it's definitely
43:08important it's required if you have if
43:11you're taking somebody's information you
43:13have to have a privacy policy up on your
43:16website or your app in California so
43:18this is something you need to do there
43:22in certain circumstances you're going to
43:24need to hire a lawyer in this situation
43:25so as many of you probably know if you
43:28are collecting personally identifiable
43:30information from anyone in the EU you're
43:34governed by the GD P R and that's a huge
43:36quagmire and so if you fall into that
43:40bucket even though some of these privacy
43:42policy generators are fantastic they're
43:45not going to get there probably I mean
43:46unless someone's really done a great one
43:48they're probably not going to cover all
43:49the stuff you need to know for GD P R so
43:51you would probably want to get a lawyer
43:53for that let's see Jason should we work
44:0018 hours a day as a co-founder and
44:02founder of our startup how can we
44:04measure and manage our commitment status
44:06for our product so the advice we give
44:09all of our startups is to still exercise
44:12sleep and you know have some semblance
44:15of a life in terms of like maintaining
44:18some of your relationships and
44:19friendships so 18 hours a day is not
44:21something that we would recommend really
44:23except for maybe like short Sprint's
44:24where you need to get something out and
44:26you know just remember that this is just
44:28gonna be a multi-year journey and where
44:31you're building a company so to use the
44:33tired cliches it's a marathon not a
44:35sprint you don't wanna get sick okay
44:38John should we have a shareholder
44:40agreement and what should be included in
44:42a good shareholder agreement shareholder
44:44agreements are really a non-us type of
44:47document it's you it's a document
44:49describes in detail what happens when
44:52when their departures severance bounder
44:55breakups or all different types of
44:58situations and often that can be very
45:01detailed the ones I've seen Canadian
45:03companies have come in with them but
45:05it's really a foreign thing not so much
45:07a US goes back to what we were saying or
45:10what I was saying earlier you want to
45:12keep things simple there's no reason to
45:15have this giant prenup in a situation
45:17for a start-up I mean chances are if
45:20things go wrong with a start-up there's
45:22there are no assets to divide anyway
45:24it's not like a marriage using the
45:27prenup oh no except when you break up
45:29except when you break up in a marriage
45:31there are assets hopefully
45:34a house couch television whatever yeah
45:38you know you need a prenup sometimes of
45:41course startups these detailed documents
45:43that I get from you know the Netherlands
45:46about what happens when a company breaks
45:49up with no assets seemed just like a
45:52waste of time to me overkill to clarify
45:55for some people so this I think that the
45:57person who asked this question was
45:59talking about the shareholder agreements
46:00that John was talking about which is
46:01among founders when you sell preferred
46:04stock to investors in like a series a
46:06financing there are shareholder
46:08agreements and they do govern a lot of
46:10the things that he just talked about but
46:11that's between the company and the
46:13investors so that is different and that
46:15is of course a very u.s. thing so yeah
46:17so just to make sure people weren't
46:18confused about that okay our last
46:20question for Jason many companies have
46:23information about their rounds like
46:24price per share or amount rate raised
46:26displayed on pitch book CrunchBase and
46:29other sites given that this seems to be
46:32due to company charters and filings
46:34being publicly available is there any
46:37way to prevent outsiders from seeing
46:38this detail about your company so that
46:41the the technical answer is yeah there
46:43there are ways there are methods you can
46:45use to actually conceal some of the
46:47information that the charters the
46:48charters the publicly filed document
46:49people can pay you know hundred dollars
46:51or whatever to pull down the Charter
46:53from Delaware and look at some of the
46:54details of your company so that's sort
46:56of like the literal answer but I think
46:58the larger answer is just it's not
47:00something that I would worry about early
47:02because it's it's sort of way down on
47:04the list of priorities in terms of what
47:05you need to sort of think about and plan
47:07for and look there are plenty of
47:10companies that have this information
47:11listed at pitchbook they're doing fine
47:13and plenty of others are you know not
47:16doing fine because and it's not because
47:17they're on pitch Brooker not on pitch
47:19book it's because of other things so
47:21it's just I wouldn't spend a whole lot
47:23of time thinking about this so Jeff and
47:26adora I don't know how we're doing on
47:28time and whether or not you want to do
47:35are there any questions shockingly there
47:41are why don't we take just a few
47:43questions okay all right yeah that goes
47:52that I'm not an expert a non-profit
47:55someone thinking oh thank you
47:58she's asking about be corpse which is a
48:00quasi nonprofit and for-profit corporate
48:04social social enterprise where you're
48:06part of your mission is is to help
48:09support the public good that's not
48:11something I'm an expert in unfortunately
48:14many companies have been doing it
48:16recently it's much more prevalent I just
48:19I'm not really qualified just changes
48:21the fiduciary duties right so the whole
48:22goal of the coming the goal of your
48:24average corporation is you make money
48:25for the stockholders right B Corp is
48:27more like there's a social good so the
48:29fiduciary duties on the part of the
48:32management and the directors are
48:33different and like Jon said they're
48:36gaining in popularity so I think we're
48:38gonna see a lot more of them yeah it's
48:41not really ycs things so we don't I
48:43would hesitate to give you any like
48:45advice about them but I know there's
48:47actually a couple good books about them
48:48I have one of them as I've read it but
48:50there's a lot of information out there
48:52about them um you know if not for YC is
48:56maybe but it could be fun yeah it could
48:59be fine it's just we haven't done a lot
49:00of them so we don't really have any data
49:02about what that looks like long-term one
49:09point about a B corporation is is you
49:12can imagine it might not be as
49:13attractive to your typical venture
49:18investor so it depends what the goals
49:20for the company if you're looking to
49:21create a start-up which is high growth
49:23fast growth you won't generally see a B
49:26Corp and most investors probably look at
49:28that somewhat askance I will say we do
49:31have one recently that converted into a
49:34B Corp that had been around for like
49:36five or six years so that's something
49:43don't because I don't worry later might
49:46be harder yeah could be done I just
49:48don't know the wisdom of it
49:55president Australian
50:03a new chart you guys know
50:17yes it is similar the question is a levy
50:21of a SAS company in Australia and you're
50:23attacking the US market but you're also
50:25in Australia you're not sure where to
50:26incorporate again like the the the key
50:30is like where are your customers it
50:31sounds like you have you're thinking
50:35about the US you know 100% sure and and
50:37I would just figure out like really
50:39where you want to be most you know from
50:43a practical standpoint again like
50:45setting up complex structures is really
50:48what the question that we were talking
50:49about earlier and I have like a little
50:51aversion to that you know it could be a
50:53good situation where it makes sense to
50:56have a parent subsidiary structure for
51:00you but it's a little more complicated
51:05incorporate in the US and then have your
51:08Australian company be a sub but again
51:12you could just incorporate in the US and
51:14just sell into Australia like you could
51:16just not I mean if that's your market
51:18and that's where you want to raise money
51:19just incorporate and be a US company we
51:22always suggest US companies it's much
51:24easier to fundraise in the US and much
51:26more favorable terms in my opinion so I
51:29always tend to push people to be in the
51:33US it's just better for the business
51:45these UI co-founders ended here
51:51if you have to restart
51:55there's four in the same question
52:01okay so his question was when you add
52:05new co-founders like later on maybe a
52:08year or so later do you have to restart
52:10all the original founders vesting
52:12schedule to match the new and the answer
52:15its no you do not so you put you and
52:18your original team of co-founders let's
52:20say you put four year vesting on your
52:22founder stock and then a year later you
52:24find a fourth co-founder you think is
52:26great by the way be a little bit
52:28circumspect about throwing the word
52:30co-founder around like sometimes that
52:32person who comes a year later is just a
52:33key hire and not a founder there's a lot
52:36of emotional attachment to the word
52:37founder and in the Silicon Valley we all
52:39know why but like not everyone's a
52:42co-founder anyway but to answer your
52:45question no you guys will stay on the
52:46same vesting schedule the new person who
52:48came a year later will start four years
52:50on the day that he or she started at
52:52your company now the thing that some of
52:54you probably already know is that when
52:56your investors come in they may decide
52:59they want to restart you all they would
53:02I mean unless you had absolutely zero
53:04leverage so not going to start you back
53:05on square one but sometimes investors
53:07look at your schedule and they say ah
53:09you guys only have about a year left
53:11that's not really enough for us can we
53:13put on another year so that happens
53:15every now and then and again it depends
53:17a lot on leverage but don't be surprised
53:19if that happens did that answer your
53:29so you talked about having basic culture
53:32we have employers on-site us and totally
53:35Beatles implied public happened in the
53:37u.s. NPD if we don't want to list an
53:39empty in the foreign country so the
53:42question was how do you hire outside the
53:45US when you have a u.s. yeah so the the
53:56short birds unsatisfying answer is going
53:58to be that it depends on which country
53:59because each country has different sort
54:02of rules for who counts as an employee
54:03and who counts as a contractor and what
54:05you have to do in order to actually you
54:07know satisfy those rules and then also
54:10when you actually open up a significant
54:12presence in any sort of foreign country
54:14what you oftentimes have to do is create
54:16a local entity and sometimes that can be
54:18a subsidiary and sometimes it could
54:20actually just be something more simple
54:21like a local branch and again your menu
54:25of options sort of depends on which
54:26country you're going into so I don't
54:30know do you have like a country it
54:31specifically yeah India so India
54:33typically what happens is there's a
54:34subsidiary that's created it's usually
54:36owned 99% by the American parent the
54:38Delaware parent and 1% you know or some
54:41other small percentage but two or one or
54:43two local Indian sort of Representatives
54:46and then that subsidiary is the one that
54:48then hires employees in aviation look at
54:55so I think if you want to try and avoid
54:58that kind of structure you know yeah I'm
55:00not an expert on Indian law you probably
55:03need to talk to somebody who actually
55:05has a license in India to actually
55:07advise on the employment issue because
55:08you know it just like the in the United
55:10States various countries have stronger
55:13or weaker protections for when you can
55:15classify somebody as an employer or not
55:18thank you guys very much so sorry to
55:29have to cut off I know there's a lot
55:30more questions live here remember Darby
55:33Wong is from Clerke is having an AMA now
55:37tomorrow but it's open now you can post
55:40questions so if you have questions that
55:42that is an outlet and you can always
55:44work with your group to ask more
55:45questions just one more word on the part
55:49time question which has come up a few
55:51times and we discussed a little bit at
55:53the break the way I look at that it is
55:56certainly true that some companies are
55:59kicked off while people are working in a
56:03full-time job but those aren't really
56:06companies yet they're just projects
56:08they're just ideas once you really start
56:10your company and all of the great
56:12companies have this feature you'll be on
56:16it full-time you'll be on a more than
56:18full time you'll be on at 120 percent so
56:21thank you all for coming in person and
56:23thank you for watching online
56:29just a couple reminders there will be a
56:33conversation with the founder of Y
56:36Combinator Paul Graham on Friday as well
56:40as the AMA tomorrow with Darby next week
56:43we're going to dive into product with
56:45the CEO of YC Michael Seibel and David
56:50recycle from Weebly on building product
56:53and product market fit there are also
56:56several great videos in the startup
56:58library on product that I very much
57:01encourage you guys to take a look at and
57:09many of you already have post on the
57:11forum posting your group and figure out
57:14how it works hopefully it'll be good
57:16home for all of you and if you have any
57:17issues send an email to accommodate our
57:19at startup school org and everyone have
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