Lecture 18 - Legal and Accounting Basics for Startups (Kirsty Nathoo, Carolynn Levy)

General C chrisy and carollyn and they're going to talk about uh finance and legal Mechanics for startups um this is certainly not the most exciting of the classes sorry but if you get this right uh this is probably the class most so thank you very much for coming and uh yeah goe okay so like Sam said this lecture is about the mechanics of startup and kiry and I are going to be talking about some of the basic legal and accounting issues that your startup May face in the very beginning um I was watching Paul Graham's

video and at one point he says Founders don't need to know the mechanics of starting a startup I thought oh no that's exactly what Sam titled this lecture um but what PG actually says is that Founders don't need to know the mechanics in detail um because it's very dangerous for Founders to get bogged down in the details and that's exactly right and Kirsty and I can't give you details in 45 minutes anyway so our goal here today is to um make sure that you do know better than to form your startup as a Florida LLC

so as Sam mentioned we were also worrying that it's going to be pretty boring for for you to listen to a an accountant and a and a lawyer talking about this um you know you've had some really amazing Founders talking about really interesting things but but like Sam said you know this this is the kind of stuff that if you know the Basics you can get yourself set up in the right way avoid pain stop worrying about it and then concentrate on what you actually want to do which is make your company a success and

so you know we refer to this term startup all the time and probably in the back of your head you kind of know that by startup we mean there has to be some legal entity and that's you know some kind of separate legal entity um we'll talk a little bit more about how we actually set that up and what that means to you and you also probably know that a startup will have assets IP inventions other things and that the company needs to protect those so we'll talk a little bit more about that about how

to raise money um hiring employees and entering into contracts so there's a few other things that that you need to talk about whilst you're setting up your company which kind of fits out a few issues amongst Founders things like who's going to be in charge and how much Equity is everybody going to own so those are really good things to talk about too oh we've lost our slides there we go okay this is us Kirsty has the calculator I have like the geriatric glasses which is actually pretty fair okay so the first thing we're going

to talk about is formation Christy actually just mentioned that um your startup is going to be a separate legal entity um and the and you guys probably already knew this but the primary purpose for forming a separate legal entity is to protect yourselves from personal liability and what that means is if your company ever gets sued um you know it can't it's not your money in your bank account that the that the person could take it's the corporation so that's why you form one so then the question is where do you form one and theoretically

you have 50 choices um but the easiest place is Delaware and I'm sure you're all familiar with that as well but um Delaware is in the business of forming corporations um the law there is very clear and very settled it's the standard the other thing is that investors are very comfortable with Delaware they already invest uh in companies that are Delaware Corporations most of their Investments are probably Delaware Corporations so if you are also a Delaware Corporation then everything just becomes much more simple right there's less diligence for the investor to do you don't have

to have a conversation about whether or not to reincorporate your Washington company into Delaware so there's a reason that so many companies do it it's standard it's familiar so I'll tell you a story we had a company at YC uh about two years ago that was originally formed uh as an LLC in a state that I'll I'll say Connecticut um the founders had some lawyer friends there who said this is the right way to do it and when they came to YC we said you guys need to convert to Delaware so uh the lawyers in

Connecticut did the conversion paperwork and unfortunately they didn't do it right they made a very simple mistake but it was a very crucial mistake the company was recently raising money like a lot a lot of money and this mistake was uncovered that the basically the mistake was this company thought it was a Delaware Corporation for a couple years but in fact it was still a Connecticut LLC and I'll just say this four different law firms were needed to figure that one out two in Delaware one in Connecticut one here in the silon valley and the

bill right now is at $500,000 for a conversion mistake so so what's the takeaway here pretty simple uh keep it really simple and familiar for yourself the reason we incorporate all companies the same way at White combinator is because it's easy so don't get fancy just save yourself some time and money okay so once you've decided that you're going to be a Delaware Corporation how do you actually set that up um and it requires a few different steps but the first one is actually really easy you literally just fax two pieces of paper into Delaware

saying we're going to set up a corporation um all that does though is create a shell of a company it doesn't actually do anything within the company so after that you then need to complete a set of documents that among other things um approve the bylaws of the company it creates a board of directors it creates offices of the company Delaware requires that somebody has the title of CEO president and of secretary so also at this point you need to complete documents that assign any inventions or any code or anything that you as an individual

create so that the company actually owns that um and remember at this point it's it's a really good thing to think about you as Founders have to think about things in two different ways um you always have to be thinking am I doing this as an individual as me or am I doing this on behalf of the company which is a separate entity so you have to maintain that split in your mind going through all of this and we'll talk more about where that comes in uh a little bit later so there are services that

can help you get Incorporated of course you can use a law firm um but there are also other online services that help and the one that we often use with a lot of the YC companies is called clerky um clerk.com and they are set up so that all the standard basic documents are used and they get you set up in a very vanilla way so that you can just move on and keep keep focusing on what you need to do so a note on paper work um you're creating documents these are really important documents that

are going to be setting what the company does and what the company is so it's really really important that you actually keep these signed documents in a safe place and it sounds so basic but we get so many Founders coming to us saying oh I don't know the these some documents and they have no idea what they are or where they are so really really make sure that you keep them in a safe place and let's be let's be honest this is not the Glamorous part of running a startup you know filing documents um but

actually at the Times where this is crucial are going to be at really high stress times in the startup's life it's likely to be if the company's raising a big series a round or if the company is being acquired the company will have to go through due diligence and there will be lawyers asking for all this stuff and if you don't have it and you don't know where it is it's just making a really stressful situation even more stressful so really the you know the key thing here is like we say keep it simple but

keep those documents in a safe place um and keep it organized it'll make your life so much easier okay so now we're going to talk um about equity and we're going to touch on a couple different things um in this section the first thing that we're going to talk about is equity allocation so um what am I talking about here I'm talking about if your company's stock is a pie you're talking about how to divide the pie and you're talking about this with your co-founders why is this important um well if you're a solo founder

this really isn't important but if you are a team of two or more then this issue is absolutely critical so the first thing that you need to know is that execution has greater value than the idea what do I mean by that a lot of founder teams give way too much credit and therefore a lot of the company's Equity to the person who came up with the the idea for the company and ideas are obviously very important but they have zero value who's ever heard of a billion dollar payment for just an idea so value

is really created when the whole founder team works together to execute on an idea um and so you need to resist the urge to give a disproportionate amount of stock to the founder Who is credited with coming up for the idea for the company uh the next thing you want to think about is okay so how much stock or should the stock be allocated equally among the founders and from our perspective the simple answer is probably yes um our Mantra at Y combinator is that um stock allocation doesn't have to be exactly equal but if

it's very disproportionate that's a huge red flag for us we wonder what conversation is not happening in among the founder team when the ownership isn't equal for example is one founder secretly thinking that this whole startup thing is uh temporary is one founder overinflating the work that he or she has already done on the company or overinflating his or her education or prior experience do the founders really trust each other and have they been honest with each other about their expectations for this startup and for the future so when ownership is disproportionate what we worry

about is that the founders are not in sync with one another thirdly um it's really important to look forward in the startup not backwards inste another way uh all all the founders in it 100% are they all in it for the long haul if the expectation at your startup is that each founder is in it 100% and you're all in it for the long haul then everything that happened before the formation of the company shouldn't matter it doesn't matter who thought of the idea it doesn't matter who did the coding or who built the Prototype

or which one has an MBA it will feel better to the whole team if the allocation is equal because the whole team is necessary for execution so so here's the Takeaway on this point in the top YC companies which we call those you know with the highest valuations there are zero instances where the founders have had significantly disproportionate Equity split all right so you've had the conversation about how to split the equity but then what um again we talked to many Founders who are actually surprised that they have to do something in order to own

this stock um they think about they think that talking about it is is actually enough um and this again it's another situation where you have to think about you as an individual versus you as a representative of the company and if you if you equate this to a large company you know if you if you worked at Google and you were told as part of your compensation package that you would be receiving some shares you would expect to sign something to get those shares and if you didn't you'd be thinking ah what's going on here

well it's the same thing with with a small company as well so in this case case the paper the the documents that you're signing is a stock purchase agreement so you as an individual buy the shares from the company and in any situation if you're buying something there's a two-way transaction where you pay for something and you get something in return um and in this case you're getting shares in return for either a cash payment or for contributing IP or inventions or code to the company so that the company actually owns everything that you've done

in in the past so we also refer to that stock being restricted um because it vests over time and we're going to cover that next um in more detail but as a result of the stock being restricted investing there's one very very crucial piece of paper that we talk about until we're blue in the face to everybody because there's actually no way to go back and fix this and this is actually one of the things that because there's no there's no way to fix this this has blown up deals in the past we've we've seen

companies where because they haven't filed what's called an 83b election um deals have blown up and I'm not going to go into detail about what that 83b election is actually about but just leave it as it affects your individual taxes and it affects the company's taxes and so it can have a big impact so you know here we have the main the main things here are sign the paperwork sign the r sign the stock purchase agreement sign the 83b election and make sure that you actually have proof that you've sent that in because if you

don't have the proof it just goes into a black hole at the IRS and investors and acquirers will walk away from a deal if you can't prove that okay so the next thing we're going to talk about um is vesting and I imagine that many of you are familiar with what vesting is but just in case really simply um vesting means that you get full ownership of your stock over a specific period of time so we're talking about the stock that ciry just said you bought your stock of your company and you own it and

you get to vote it but if you leave before this vesting period is over then the company can get some of those unvested shares back so um and I'm just going to just so you guys know uh the other ways to refer to vesting you'll hear um restricted stock that means that that stock that's subject to vesting the IRS speak for this is shares that are subject to forfeiture so so a little terminology there um okay so what should a typical vesting period be in Silicon Valley the so-called standard vesting period is 4 years with

a one-year Cliff this means that after one year the founder veston or fully owns 25% of the shares then the remaining shares bestest monthly over the next 3 years so here's here's an example founder buys stock on Christmas day let's say and then quits the company on the following Thanksgiving so before the year is passed um in that case the founder leaves with zero shares right Cliff period hasn't been met um if the founder though quits the day after the next Christmas so a year and a day later he or she is vested in exactly

25% of the shares right in that case the one-ear cliff has been met so what happens to the shares when a when a Founder stops working at the company um company can repurchase those shares in the example I just gave where the founder quit a year and a day after purchasing the shares 75% of those Shares are still invested and the company will repurchase all that full 75% of those shares from the founder how just writes the founder a check that's how the founder bought it right so it's the same price per share that the

founder paid and it's really just giving the founder his or her money back so then the question is why would have vesting why would Founders do this to themselves right because it's just the founders they're they're doing this on their own shares um doing this to their own shares so and probably the number one reason why vesting is important uh has to do with Founders leaving the company so without say if you didn't have vesting and a Founder leaves a huge chunk of the equity ownership leaves with her him with him or her and obviously

that is not fair to the founders left behind and we're actually going to talk about this a little bit more when we get to the founder employment slide I'll go into that in more detail but the other reason to have vesting is the concept of skin in the game the idea that Founders need to be incentivized to keep working on their startup if a Founder can walk away with his or her full ownership at any point in time then why would you stay and grind away startups are hard so um do single Founders need besting

they do and the reason is because the skin in the game concept applies to solo Founders as well and investors really want to see all founders even solo Founders incentivized to stay at the company for a long time and the other reason that single Founders should put vesting on their shares is to set an example for employees because you can imagine it would be you know inappropriate for a Founder to tell an employee that he or she has to have foure investing on his or her shares but the founder doesn't think that he or she

needs any on their own shares um it's really culture Point um a Founder who has vesting on his or her shares then sets the sets the tone for the company saying we're all in it for the long haul we all have vesting on our shares we're doing this together so what are the takeaways from here I would say um vesting aligns incentives among the founders if they all have to stick it out and grow the company before any of them get any of that company and then number two investors don't want to put money in

a company where the founders can quit whenever they feel like it and still have a big Equity ownership stake in that company okay so moving on we've now got a beautifully formed Corporation in Delaware everybody's got their stock um it's all the the plain vanilla standard paperwork so so then what you know probably the next stage of a company's life is needing to raise some money um so we're going to we're going to talk a bit more about that and and you know we know that you've already heard a lot from investors and from Founders

already in in this set of classes um and they've been talking much more around the tactics and how to raise money but what about the paperwork what about when somebody actually agrees to invest then what so first of all in terms of Logistics in very simple terms there are two ways to raise money so either the price is set for what the the money that comes in or the price isn't set and by price we mean the valuation of the company it's it's the same things so rounds can actually be called anything people can can

name them whatever they want but generally if you hear the term seed round it would mean that the price has not been set and anything that's a series A or a series B would be something where the price has been set so not setting the price is the more straightforward fast route to getting money and usually the way that this is done is through convertible notes or safes and again this is a two-way transaction so there's a piece of paper that says for example that an investor is paying $100,000 now and in return has the

right to receive stock at a future date when the price is set by investors in a priced round so it's important to note that at the time the paperwork is set that investor is not a shareholder and therefore doesn't have any voting rights on the company they will have some other rights um which Caroline is going to talk about separately of course investors want something in return for putting in money at the earliest I.E riskiest stage of the company's life and this is where the concept of EV valuation cap comes in which I'm sure many

of you have heard mentioned before so usually the documents um for an unpriced round set a cap for the conversion into shares and that's not the current valuation of the company um It's actually an upper bound on the valuation used in future to use uh used in future to calculate how many shares that investors is going to get so for an example an investor that invests $100,000 on a safe with a $5 million cap um then a year later the company raises a priced round with a valuation of let's say $20 million um then the

early investor would have a much much lower price per share about a quarter um and therefore their $100,000 would buy them approximately four times more shares than an investor that was coming in and putting in 100,000 in that series a priced round so that's where they get their their reward for being in early so again this is another situation where you need to make sure you have the sign documents um and you you know where they are because different investors may have different rights and so you need to know what those things are and again

services like clerky can can help with that they have very standard documents that most of our YC companies use to raise money on a couple of other things to think about when you are raising money um hopefully you've got a really hot company that's that's doing great and it's really easy to raise money but you should be aware that all these people throwing money at you does have some downsides um so the first thing is to understand your future dilution so if you raise let's say $2 million on safes with a valuation cap of $6

million then when those safes convert into Equity those early investors are going to own about 25% of the company and that's going to be in addition to the investors that are coming in at that price round who may want to own 20% of the company so you've already at that point given away 45% of the company so is this really what you want and you know the answer might be yes um remember that some money on a low valuation cap is infinitely better than no money at all and if those are the terms that you

can get then then take that money um but it's just something to be aware of and to follow through the whole process so that you can see where this is going to lead you down the road the other thing to bear in mind is that the investors should be sophisticated um and by that we mean that they they have enough money to be able to invest um and that they they understand that investing in startups is a risky business you know we we see so many companies coming into us that say oh yeah my my

uncle put money in or my neighbor put money in and they've put in5 or $10,000 each and often those are the investors that cause the most problems going forward because they don't understand how this is a long-term game um and so you know they get to the point where they're sitting thinking hm I could actually do with that money back because I need a new kitchen or you know this this startup investing is not actually as exciting as all the TV shows and movies made it out to be so and those those cause problems to

the company you know if they're they're asking for their money back so just be aware that that you should really be getting money from people who are sophisticated and know what they're doing and the term that you'll hear that that refers to these people are that they are accredited investors so really the main the main points here is keep it simple raise your money using standard documents um keep make sure that you have people who understand what they're getting into and understand what you're getting into in terms of future dilution okay so uh you're raising

money you understand what you're selling figured out the price you've got down the logistics that ciry just described um but what you may find is that you don't understand some of the terms and terminology that your investors are using and this is okay but you have the burden to go figure that stuff out um don't assume that just because you've agreed on the valuation or the price um that all the other stuff doesn't matter because it does matter and you need to know how these terms are going to impact your company in the long run

why combinator um C and I here found say all the time I didn't know what that was I didn't know what I was signing you know I I didn't know I agreed to that so really the burden is on you to figure this figure this stuff out and we're going to go over four common investor requests so the first one is board seat um some investors will ask for a seat on your company's board of directors and the investor usually wants to be a director either because he or she really wants to keep tabs on

their money or because he or she really thinks they can help you run your business and you have to be really careful about adding an investor to your board in most cases you want to say no otherwise make sure it's a person who's really going to add value having money is very valuable but someone who really helps with strategy and direction is priceless so Choose Wisely the other thing is advisors there are so many people who want to give advice to startups and so few people who actually give give good advice once an investor has

given your company money that person should be a de facto adviser but without any official title and more importantly without the company having to give anything extra in return for the advice so here's an example um at y commentator we've noticed that whenever startup manages to Garner a celebrity investor the celebrity almost always asks to be an adviser we have a company that provides on demand bodyguard services and an NBA basketball player invested asked to be an adviser and then asked to be given shares of common stock in exchange for the advisor services and the

services that this person had in mind this investor had in mind would be to introduce this company around to all the other professional basketball players who might want to use an ond demand bodyguard but this celebrity just made a big investment um shouldn't he want to help the company succeed anyway why does he need something extra all investors who can help should do so asking for additional shares is just an investor looking for a freebie okay next we're going to talk about PRS what are Prat rights some of you may have heard of this before

but very simply it's the right to maintain your percentage ownership in a company by buying more shares in the company in the future for rather rights are a a way to avoid dilution and dilution in this context means um owning less and less of the company each time the company sells more stock to other investors so this is a really basic example but say an early investor buys shares of preferred stock and ends up owning 3% of the company once the financing has closed and the company raises another round of financing and the company will

go to this investor who negotiated and got Pro rights and say hey we're raising more money so you're welcomed to buy you know this many shares in the new round to keep your ownership at approximately 3% that is pro rights that they're very most basic so PR wrs are very common requests for from investors and they are not necessarily bad thing but you absolutely as a Founder need to know how Prat writs work especially because Kirsty touched on this a little bit the corollary to an investor having Prat rights to avoid dilution is that the

founders typically suffer greater delution so the final thing is information rights investors almost always want contractual information rights about to get certain information about your company um giving periodic information and status up updates is not a bad thing in fact at YC we encourage companies to give monthly updates to their investors because it's a great opportunity to ask for help for your from your investors like um introductions or help with hiring that kind of thing but you have to be really careful about overreach any investor who's saying they want like a monthly budget or a

weekly update that's not okay so the takeaway here is that just because the type of financing and the valuation has been negotiated doesn't mean that everything else is unimportant you need to know everything about your financing okay so then moving on to after you've got that money um you know you've raised some money the the company bank accounts probably showing more zeros in it than you've ever seen in your life so so then what um this is where you actually start incurring business expenses and business expenses are the cost of carrying out your business so

things like paying employees um paying rent for an office hosting costs acquiring customers that kind of thing and business expenses are important because they get deducted on the company's tax return to offset any revenues that are made to lower the taxes that the company pays and on the flip side if it's a non business expense that the company incurs then that is not deductible on the tax return so that can increase the profits that the company then have to pay tax on so again this is this is a separation issue um the company will have

its own bank account and that's where the company's expenses should be paid out of um again you know thinking about this from a from a large company if you were working at Google you would not use a Google credit card to buy a toothbrush and toothpaste so the other thing to remember is that you know the investors gave you the this money they trusted you with all these huge amounts of of of money and they want you to use that money to make the company a success it's not your money for you to spend how

you please and believe me we've had some horror stories of Founders who take that approach uh we had we had one founder that we knew of who Took investor money and went off to Vegas and boy by his Facebook photos did he have a good time uh needless to say is no longer with the company um but really this is this is stealing from the investors um you know think about it the the concept of business expenses can get a little bit blurry especially in the early days when you're working outside working in your apartment

and you're working 24 hours a day but the way to think about it is if an investor asked me what I'd spent their money on and I had to give a line by line breakdown of that would I be embarrassed about telling any of the telling them what any of those lines were and if you were it's probably not a business expense so the other thing to bear in mind is that you know you're busy running your company at 90 miles an hour just constant constant so you don't have to necessarily think about the bookkeeping

and accounting at that point but it's really crucial that you do keep the receipts so that when you do engage a bookkeeper or a CPA to prepare your tax returns they can unpick all of this and they can figure out what are business expenses and what aren't business expenses but they're going to need your help as a Founder because they aren't going to know what all these things are so there is some involvement from you and the way to make the involvement the least amount possible is to keep those documents in a safe place so

that you can refer back to them so if nothing else that you remember do not go to Vegas on Investor's money and spend that money wisely okay so um in this section we're going to talk about just doing business and we're going to hit a couple of uh a couple of topics in this section so the first one is founder employment why are we talking about founder employment because as we said a couple times already the company is a separate legal entity it exists completely separate and apart from you as Founders and so no matter

how prestigious we in the valley think the title founder is you're you're really just a Company employee and Founders have to be paid working for free against the law and Founders should not let their company take on this liability you wouldn't work for free anywhere else so why is your startup an exception and companies have to pay payroll taxes we had a YC company that completely blew off their payroll taxes for 3 years it was a huge expensive disaster and in extreme cases people can actually go to jail for that fortunately not in this case

but but um it's bad so the moral of this story is set up a payroll service this is something that is worth spending your money on but and I actually think I'm sure some of the other lectures have touched on this point and actually kiry just mentioned it too don't go overboard on lavish salaries minimum wage this is still a startup and you have to run lean so now I'm going to mention founder breakups and um first well what is a Founder breakup in this context I'm talking about founder on the team being asked to

leave the company which because I've just said Founders are employees that means your co-founders are firing you um so why are we talking about breakups in the context of founder compensation and it's because um at YC we have seen a ton of founder breakups and we know that the breakups get extra ugly when the founders haven't paid themselves why how does it get ugly um unpaid wages become leverage for the fired founder to get something he or she wants from the company and typically that is vesting acceleration so the fire founder says hey my lawyer

says you broke the law by not paying me um but if you pay me and you give me some shares that I'm actually not really entitled to I'll sign a release and make all this ugliness go away and if you're the remaining co-founders you're probably like sounds like a good deal and so now you have a disgruntled person who owns a piece of your company and even worse in a sense the remaining Founders are kind of working for that XF founder right because they're building all the value in the company and the XF founder who

got fired is just sitting there with their shares going that's right make it valuable so what's the takeaway here avoid Problems by paying yourself paying your payroll taxes and thinking of your co-founders wages like a marital prenup and as well as the founders you are going to need to hire employees and again A lot has been spoken in previous in previous classes here about how to find those people what makes a good fit how to make them really productive employees but when you actually find somebody how how do you hire them you know what's what's

involved and employment is governed by a a huge raft of laws um and therefore it's important to get this right it's again the kind of nitty-gritty stuff that as long as you know the basics you can probably keep yourself out of most situations but as soon as things get complicated ated you need to get yourself involved with a specialist so the first thing you need to do is figure out if the employee or if the person is really an employee or a contractor and there are subtle differences to this classification and this is important to

get right because the IRS takes a big interest in this and if they think you've got it wrong they will come after you and with fines both an employee and a contractor will sign documents that assign any IP that they create to the company and that's obviously really important but the the form of the document is very different for each each type of person and the method of payment's very different so generally a contractor will be able to set their own work hours they'll be able to set their own location they will be given a

project where there is a an end result but how they actually get to that and the means they use will will not be set um they'll be using their own equipment and they'll not really have any say in the day-to-day running of the company or the strategy going forward and a contractor will sign a Consulting agreement and then when the company pays them the company doesn't withhold any taxes on their behalf um that's on the responsibility of the individual but at the end of the year the company will provide what's called a form 1099 to

the individual and also a copy to the IRS which they'll use used to prepare their personal tax returns the opposite side of this is is an employee um and an employee will also sign some form of Ip assignment agreement but when the company pays them the company will withhold taxes from their salary and then the company is responsible for paying those taxes over to the relevant state and federal authorities and at the end of the year the employee receives what a W2 form which will then get used to prepare their personal tax returns so as

Carolina said the founders need to be paid so do employees um it isn't enough to just say well I'm paying them in stock so that can be that can be their their compensation and they need to be paid at least minimum wage so in San Francisco which actually has a slightly higher minimum wage than than California as a whole that works out about $2,000 a month so you know it's not a huge amount but it can add up there's also another couple of things that you need to be you need to make sure that you

have if you have employees so the first thing is that you're required to have Workers Compensation Insurance and especially if you're in New York where the New York authorities that look after this will send really threatening letters saying you owe $50,000 in fine because your one employee that's being paid minimum wage has not paid the $20 a month of workers compensation fees so it is really important that you do you do set that up and the other thing that's very important is that you do need to see proof that the employee is authorized to work

in the US you know Founders are not Payroll Experts and nobody expects you to be one either this is all just about the basics but what that does mean is that you absolutely must use a payroll service provider uh who will Who will be able to look after this for you and services like Zen payroll are again set up they're focused on startups and they help you get this set up in the easiest way possible so that again you can go back and concentrate on on what you do best and in the example that Carolyn

gave just a few minutes ago if that company had actually set themselves up with a payroll service provider all of that heartache would have gone away because it would all have just been looked after for them they were trying to save money by not doing it and look where it got them so that's that's really the key thing use use a payroll service provider and make sure that you understand the basics of employment we're running start on time yeah um okay so I can Breeze through really fast firing employees slide and then sh or should

we cut it off now for questions what uh why don't me do firing real fast okay okay okay so somebody at YC once said you're not a real founder until you've had to fire somebody why is that because because firing people is really hard it's hard for a lot of reasons uh including because Founders tend to hire their friends they tend to hire former co-workers or they just get really close to their employees because working at a startup is really intense but in every company there's going to be an employee who doesn't work out and

firing a Founder sorry firing this employee makes a Founder a real professional because he or she has to do what is right for the company instead of what is easy so I have um some best practices for how to fire someone um number one fire quickly don't let a bad employee linger it's so easy to put off a difficult conversation but there is only downside to procrastination if a toxic employee stays around too long good employees May quit and if the employee is actually screwing up the job you may lose business or users number two

communicate effectively don't rationalize don't make excuses don't equivocate about why you're firing the employee make clear direct statements don't apologize example we're letting you go not I'm so sorry sales didn't take off this quarter blah blah blah um fire the employee face to face and ideally with a third party present number three pay all wages and ACR vacation immediately this is a legal requirement that we don't debate or negotiate this number four cut off access to digital systems once an employe is out the door cut off physical and digital access control information on in the

cloud change passwords Etc we we had a situation at YC where one founder had access to the company's GitHub account and held the password hostage when his co-founders tried to fire him and number five um if the terminated employee has any invested shares the company should repurchase them right away so the takeaway here is that as surprising as this may sound one of the Hallmarks of a really effective startup founder is how well he or she handles employee termination uh okay so then we had this section that we called legitimacy which actually kind of goes

into a little bit more about um you know how to be how to be a real company how to be sort of a grown-up company and we can totally jettison is this the last slide uh no that could be the last SL could be the last slide okay so um Cy you want to read the takeaways okay so we we've pretty much covered all of these anyway um but you know the basic the basic tenant to all of this is keep it simple do all the standard stuff and keep it organized make sure you know

what you're doing um Equity ownership is really important so make sure that you're thinking about the future rather than the three months of the history of the company and stock doesn't buy itself so again make sure you do the paperwork for that make sure that you actually know about the financing documents that you're signing up to it's not enough to just say yeah I'll take your 100K make sure you actually know those rights and you need to get paid you and the employees need to be paid and then everybody needs to assign IP to the

company because if the company does not own that IP there is no value in the company if an employee must be fired then as Carolyn as Carolyn was saying do it quickly and professionally uh the couple of things that we didn't mention was knowing your key metrics at any time you should know the cash position you should know your burn rate you should know when that cash is going to run out um so that you can talk to your investors about that and you know a lot of running a company is following the rules and

taking it seriously it's not all the Glamorous bits that we see in all the movies and and TV shows so you do have to take that seriously okay so it was shorter when we did it the first time sorry about that sorry you can get like two questions sure yeah how do you advise searching for an accountant and when in the process do you need them so there's two so the question was how do you advise searching for an accountant and when do you um when at what point do you do this so there's two

different things there's a bookkeeper and there's a CPA an accountant and generally bookkeepers will be the ones who can categorize all your expenses and CPAs are the ones that will prepare your tax returns um in the very very early days it's probably fine for the founders to just be able to see the bank statements and to be able to see those expenses coming out but tax returns have to be prepared annually and so at some point in that first year of the company's life some service is going to need to be engaged to do that

because it's just not worth the founders time to do it um there are services available like indero which kind of try to to um make things as as effortless as possible from the Founder's point of view so that kind of thing is quite useful but you do need to get a CPA at some point because you need to file your annual tax returns for the company and how do you find one um finding one is kind of tough probably the best thing is recommendations from people with with any kind of specialist a CPA or an

account a lawyer or anything like that it's always best to use people who are used to dealing with startups again not your sort of you know your who lives in Minnesota and doesn't actually know how startups work so probably recommendations are the best way all things considered what should be my budget for you know in cooperating with a lawyer for getting legal advis for my first seed round and then for hiring the first employees how much money should I set aside for that so it's in terms of incorporation don't spend a dime on that you

can do that online well actually I'm sorry it does cost a little bit um incorporating online using a a service like clerky which chisty mentioned is inexpensive like in the hundreds not in the thousands so you don't need a lawyer for that part when you actually need to hire a lawyer is it kind of depends on what business you are starting um and how complicated it is in terms of you know do you have a lot of privacy policies you it's Hippa involved I mean you can imagine there's like a ton um and so and

also then you mentioned when you're raising your seed round well how much money are you raising and who are the investors and what kind of terms are in the term sheet sometimes that dictates whether or not you need to get legal counsel and again a service like clerky can help if you are just using very standard documents for the fundraising there are just very basic vanilla fundraising documents so you can use those and again they they cost you know less less than $100 I think um which can which can save you some legal fees one

more question uh do you want to pick uh should we go back over this side I'm going to ignore let's go up for here um do you guys have any advice or comment on the complexity that comes with working with cryptocurrencies or crypto equities in particular like if you're fundraising since that's becoming more and more popular oh wow that's a tough question to end with um yes there are some there are some issues often banks will struggle to deal with with companies that are working in cryptocurrencies because they haven't quite figured out how to to

deal with it and and that sort of thing yet um generally a lot of it it it it's very product specific it's it's not something that kind of has real general advice unfortunately okay thank you very much you're welcome