Startup legal mechanics

I would like to introduce my colleague, Carolyn Levy, to my right here, who's going to talk about startup mechanics, and then with John Levy and Jason Kwan, they'll answer some questions about getting your startup started, legal issues. I will point out that these three folks are probably the finest legal minds in the startup world.

And I do not exaggerate, they may hate me saying it, but these folks have seen more, they've worked with more startups in more situations than you could believe. And some of the situations you wouldn't believe. So they know everything. And so I do hope you listen carefully. And I do hope, look, I know you gave everyone homework to watch videos from 2014 and 2017 on startup mechanics.

I urge you all to watch those videos, if you haven't already, as an adjunct to what Carolyn and John and Jason are about to say, because you will find them useful as you build your company. So Carolyn? Thank you. Jeff totally exaggerated, but we have seen a lot of stuff. Okay.

So like Jeff just mentioned, back in 2014, Kirstie and I did a startup school lecture on legal and accounting mechanics, and we were hoping that most of you would have time to watch that before you came here today. I'm going to blaze through a recap of that and just touch on the key takeaways from that lecture.

But I am gonna skip the part about investors and fundraising, because Kirstie's actually gonna do an entirely separate lecture on that stuff later on in the program. Next I'm gonna go through some common mistakes and problems that we see founders make.

And finally, Jason and John are gonna come up here, and I wanna thank all of you who sent in email questions to us beforehand, because we're gonna go through some of those on the, some of your legal mechanics questions that you guys already submitted. Okay. So the first thing you have to do when you're starting a startup is actually form your separate legal entity. This is your company.

And the act of incorporating is just filing a document called a Certificate of Incorporation, which is really short and simple for startups. And you go and you file it with the Department of Corporations in whatever state you choose to incorporate in. Now, we strongly recommend choosing Delaware, because the process in that state is really, really easy, and the service is really fast and efficient.

And that's the primary reason we suggest, but also, as a lot of you probably know, most public companies are Delaware companies, so that saves you a little time if you're gonna go public. And some investors actually will require that you're in Delaware before they'll fund you. So that's another good reason to be in Delaware. Okay. So this has been mentioned a couple times already.

We also strongly recommend that you use an online platform specifically geared to startups to incorporate. And there's a lot of these platforms. Some are good. Some are not so good. Clerky and Stripe Atlas have already been mentioned, and those are the two that we think are great. They're YC companies.

We have extensive experience with Clerky, and I was really happy to hear that Darby Wong, one of the founders of Clerky, is gonna do an AMA, because he's great. One of the reasons why we think Clerky and Stripe Atlas are so great is because they don't stop after formation.

They also have post-incorporation documents, and some of the not-so-good platforms stop after formation, and they don't do post-incorporation. And one of the things that doesn't happen if you don't do post-incorporation is founders don't buy their stock.

And when we were commuting down here today, Jason reminded me of a story, a really big company and a really big law firm, and they didn't, the founders never bought their stock, and this wasn't discovered until the Series B financing. So if you think this sounds weird, like, of course founders need to buy stock. This is a mistake that actually happens. Okay.

Another step in the incorporation process is forming a board of directors. And for early startups, the members of the board are usually the founders. If you're a solo founder, you can have a board of one. If you are two founders, you can have a board of two. There's a misconception that board of directors have to have an odd number of directors, but that is not necessary.

And then you need to appoint corporate officers. You need to have a president and or a CEO. You can have both if you want. And in Delaware, you're required to have a corporate secretary. And another part of the process is adopting corporate bylaws. For startups, bylaws can be extremely generic.

And finally, this isn't technically part of the incorporation process, but I encourage you to open a corporate bank account as soon as possible. Most startups won't have very much cash to put in that bank account, but it's great to get into the habit of treating the corporation as a separate entity as early as possible.

And it's critical to form good habits around the way you treat your company's money. Okay. So post-incorporation. So now we're going to go back to what I just said about issuing founder stock. You all know that corporations are owned by stockholders, and you and your co-founders are going to be the first stockholders. Okay.

If you are a founder team of two or more, you have to think about how you're going to allocate that stock. Our belief about the best way to allocate stock among founders is to think about the challenge of execution, and that's another way of saying the following.

Do not place too much importance on the founder that had the idea for the business, because all of the hard work is in front of the team, and all of the value is going to be created in the future. If you are all going to be working hard going forward, which you all are, we think the equity split should be more or less equal among you.

If you and your co-founders are having a really hard time coming to a consensus about stock allocation, there may be underlying trust or commitment issues with the team, so you want to pay close attention to that. Okay. Founders need to purchase their shares from the company, and you buy them using a stock purchase agreement.

Founders actually have to pay for them, but fortunately the stock of a brand-new company is very cheap. The way most founder stock purchase agreements work is that you give a very, very small amount of cash, and then you contribute to the company any intellectual property that you've created, so that's the total purchase price for your founder shares.

Founders' shares should be subject to vesting, and this ties back to the point I just made about all the work being ahead of you. Vesting means that you don't get full ownership of your stock until a certain period of time has passed.

During the vesting period, you can vote all of your shares, but if you quit your company before the full period of time has passed, the company will automatically repurchase all of your unvested shares.

When shares are subject to vesting, they're called restricted stock, so your founder stock purchase agreement will be actually a restricted stock purchase agreement, and as I'm sure most of you know, the standard or typical vesting period is about four years.

So I'm not going to get into cap tables in this lecture, because Kirstie is going to explain them in detail in her lecture about fundraising mechanics, but the basic idea is that every company absolutely needs to keep a cap table.

You need to keep a record of every single share of stock that your company issues, and we used to have to do these on these complicated Excel spreadsheets, but fortunately there are now multiple online platforms that will keep track of stock ownership effortlessly, and we'll make sure that those resources are included on one of these, on the forum. Okay.

Because founders tend to identify so closely with their startup, it's easy to forget that they actually need to be employees of their company. Let me look at that.

So it's pretty self-evident that most founders can't pay themselves in the early days of their startup, because practically, if there's no money, you can't have payroll, but if there is enough money, it's a really good idea for founders to pay themselves minimum wage. Strictly speaking, it's against the law not to pay yourselves, although obviously this isn't a thing that gets enforced. Okay.

So employment, whether of founders or others, does not require an employment agreement. Employment agreements are actually, are not actually appropriate for startups, because employment is at will by default, and the basics of hiring and firing are governed by law anyway.

In fact, employment agreements can sometimes complicate things, because courts may interpret certain of the language in an employment agreement as changing that default at will status to a for-cause status, which makes it a lot harder to terminate people.

So an employee agreement is only necessary if you're hiring an employee who's going to have something special, like a severance package, and we really don't see those in startups. But what is really, really important is that all the founders, and in the future, everyone who works for your company, has signed a CIIA or a PIIA, and I'm sure a lot of you have heard of these.

It's a Confidential or Proprietary Information Invention Assignment Agreement. The CIIA protects the company's confidential information and trade secrets and ensures that all the intellectual property that is created is owned by the company. So you want everyone in the company signed up to one of these.

Very early stage startups usually cannot afford to have employees, but the solution is not to convince people to work for your company for free. It's one thing for founders to work for free, but it's significantly riskier for non-founders creating work product and other intellectual property to work for no compensation.

So unfortunately all of you all have to do all the work until you can afford to hire. So I'm going to wrap up this summary and digress from legal mechanics to make a few common sense points, and my belief, my personal belief, is that ignoring these points can cause you to waste a lot of time fixing problems later. These are really common mistakes.

So ideally you will have opened a corporate bank account as part of or right after incorporating the company, and hopefully you have a little bit of money in it. So you should use that for all of your company expenses.

If the company bank account has no money in it and you are paying for all the business expenses with your own personal savings, the company can reimburse you later when it eventually has money, but you absolutely need to keep all the receipts and you need to document everything carefully. Corporations have to pay taxes.

If your startup is a Delaware corporation, there is an annual tax you have to pay to that state, but if you calculate it correctly, the tax owed is really minor for startups. Corporations also have to pay, they also have to file a corporate tax return with the IRS.

Obviously when your company is just getting started, you're not going to actually owe the IRS any taxes, but you still have to file the return. And if your startup does have employees, even if it's just the founders getting minimum wage, you need to pay payroll taxes, and the best way to do this is to get set up with an online payroll service, of which there are many.

Oh, this is a personal favorite of mine. So you need to find a good place to store the company's legal documents, like the Certificate of Incorporation, the Bylaws, the CIIAs, the Founders Stock Restrictions Agreements, Founders Stock Purchase Agreements. For example, a shared Dropbox folder is a good idea.

Do not store them in a co-founder's email, because you do not want one person to control the access to these very important documents. Also make sure that the legal documents that you are carefully collecting and storing are actually the signed and dated versions, and triple check to make sure that every blank is signed by every party that needs to sign it.

Later when your company is fundraising and investors are doing due diligence on your company, it just looks really amateur when you serve up a bunch of formation documents and there's a bunch of blanks in them. All right. So that's the summary of that. Oh, sorry, one more thing.

I just wanted to mention what is acting like a real company, and my opinion is that acting, if you treat your startup like a board of directors, governed, tax-paying, founder-employee, confidential information-holding entity, that that's the way to act like a real company, and this is also the only way you're going to get protection from personal liability, which is the whole point of forming a separate legal entity anyway.

Okay. Now we're going to move on to common mistakes and problems. Okay. I don't know when to form a corporation. So this isn't actually a problem or a mistake, I just wanted to talk about it here, and it turns out that a lot of you emailed us this question.

So the right timing on when to pull the trigger on incorporating is going to actually be different for every startup, but in general, we believe in doing it sooner rather than later. And so my top four reasons about why you want to do this would be, number one, because forming a corporation protects you and your co-founders from personal liability for your company's actions.

Number two, the corporation is the correct repository for all of the intellectual property that you and your co-founders are creating. Otherwise, you're all just working on a project, the separate pieces of which are owned by individuals, and to me that's a hackathon, not a corporation.

Number three, you can't raise, you all know this, you can't raise real money for your startup without forming a corporation first, because your mom might give you some money for your startup, but no professional investor is going to wire money to your personal bank account.

And you need to have a corporation in order to have payroll, and you can't enter into contracts with vendors or consultants or potential customers personally, and if you try to do these things as an individual, it's super messy. I formed an LLC instead of a corporation because I got advice that LLCs are better for taxes.

So for our purposes, this is usually a mistake, because even though LLCs are better for optimizing taxes, the vast majority of angels and VC firms will not invest in an LLC. So if you plan to fundraise from people other than a small group of your friends and family, your startup needs to be a corporation.

The question that several of you asked in the emails is whether there are other reasons besides fundraising considerations to form a corporation instead of an LLC, and so in other words, if you're not planning to fundraise for a long time after starting your company, does it make sense to start out as an LLC and then switch to a corporation later?

And in my opinion, the answer is no, because I don't believe the tax benefits of an LLC are compelling enough to outweigh the inconvenience of converting your LLC into a corporation later.

And for those of you who watched the 2014 Startup School Lecture, Kirstie and I told an anecdote about a company that was an LLC, and they had to convert into a Delaware Corp, and it was a $400,000 legal nightmare. It's obviously an outlier. But we do see this a lot at YC. We see a lot of LLC to corporate conversions, and it's just kind of a headache you don't need.

Okay, I'm thinking about hiring a lawyer to incorporate my company. So this is usually not a mistake if your startup is really complicated for some reason, or if you've already formed a non-US entity and you now want to come to the United States and raise money. In these cases, you probably do need to get a lawyer, but I'm sure all of you know lawyers are very expensive.

So save money and use one of the good online platforms that we just talked about for incorporation. Also realize that lawyers who are free, like family members doing you a favor, may not be actually as good as the online platforms because they don't specialize in corporate transactional work.

So your Aunt Sally who does personal injury may mean well, but Clerky and Stripe Atlas will do a much better job. I'm starting a startup, but I still have a full-time job. This has actually already come up today. Common problem for founders because it's a big decision to ditch the security of a salary.

I think some of the other speakers in this course will talk about sort of the psychology of taking that plunge. But if you've decided to work on your startup in your spare time, the primary legal consideration is just keeping everything separate.

So in California, for example, if you're working on your startup on your own time with your own resources, your current employer should have no claim on your new business idea. So use a different computer, don't work on it during business hours.

But keep in mind that different states and even different countries have very different rules about this particular issue, and there's things like non-compete agreements with your employer that may come into play. So if you're gonna do this, you really should do a little bit of research first or get legal help.

Our founding team has been working on this idea for years so we don't need vesting on our founder shares. This is a broken record, we hear this all the time. This is a big mistake. If you don't have vesting, you are setting your company up for future problems.

No investor wants to put money into a company with founders who may decide the next day that they're burned out so they take their shares and they leave. But the more common scenario is that one member of a founding team decides that he or she is burned out and so leaves the company with a giant ownership stake.

The remaining founders have to do all the work but someone who's not doing any work has the same ownership. It is painful to fix this problem because the price of the company's stock may have increased in the interim and it becomes really expensive for the remaining founders to allocate the share ownership fairly. How many of you are single founders? I'm just curious. Quite a few of you, okay.

So I'm a single founder and I don't need vesting, you may be thinking. I think this is also a mistake. Single founders obviously don't have the same problems that founder teams do, but no vesting is still unattractive to investors for the same reasons.

Also, you will eventually hire employees and probably grant them stock options and those stock options will have vesting and it just is a lot better when you lead by example. All right. Another personal favorite. I signed a legal document but I was too busy to read it so I have no idea what it is. This happens a lot. This is a big mistake.

We see founders do this all the time and I mean we sympathize, right? The legal mechanics of your startup are the really boring parts of the process. You can get away with not reading every word of your bylaws, for example, but you need to understand every provision in your founder stock purchase agreement.

You actually don't wanna have anything happen with your company stock that you don't know every word of. And this is actually a bigger problem. This isn't such a huge problem with formation documents. It's a big problem with fundraising documents. I can't tell you how many founders have told me they won't read a five page safe.

So you wanna get into the habit now of reading all of your company documents. It's daunting, it's legalese, whatever. Read it anyway, understand it. It's a great habit to get into. And then you'll know if it isn't signed. Okay, my friend offered to work for my startup for free so I'm going to pay her with shares.

Generally this is a mistake because people who work for your company need to be paid money. Obviously compensation packages can include an equity component but paying with only stock is not a good idea. The exception is if your friend can be hired by your company as a consultant or independent contractor, those are the same thing.

And it's okay for consultants to be paid for services with just stock. But you have to first get comfortable that your friend is properly classified as an independent contractor. And the rules in California about this just changed and got stricter.

Also you'll wanna make sure you paper this relationship with a good consulting agreement because you really wanna make sure that the company owns all of the consultant's work product. You don't wanna wing it. Okay, this is a big one. My co-founder and I don't want to work together anymore. So this is sometimes a small problem and this is sometimes a fatal problem.

Startups die sometimes because of this. And it happens unfortunately a lot. And it can be overwhelmingly acrimonious. It's kind of like watching people get a divorce. So the reason to pay careful attention to the points I've already mentioned, like paying yourselves, having vesting on your founder's shares, having a CIIA that clearly demonstrates that the company owns all the IP that's created.

Doing these things can significantly decrease the legal drama around breakups. I don't know what decreases the emotional drama but that decreases the legal drama. My company has some employees and I promise to issue them stock. This isn't a problem as long as you take action on it sooner rather than later.

And the appropriate action to take is to adopt a stock incentive plan and to grant stock to these early employees. A stock plan, as some of you probably know, is like a 15 to 20 page document. It references a specific number of shares of your company's common stock that are allocated to the plan. The company can issue restricted stock or stock options pursuant to the plan.

But what you need to know about stock options is that if you grant stock options you have to get something called a 409A valuation. And most startups don't want to do this until after they've had a fundraising event. So you can issue restricted stock to employees under this plan and they will also have vesting.

And they come with a whole host of tax and securities rules which is why the plan needs to be 20 plus pages long. But the reason to not wait too long to do this is because the longer you wait the more expensive your stock will get. And so you want to give your employees cheap stock or as cheap as you can because expensive stock is not very incentivizing. I got a cease and desist letter.

Another company says my company is infringing on its trademark. This is a problem an early stage startup really doesn't need but we actually see it happen fairly often. Founders get very attached to names and once this happens it's really tough to let go. But your company is probably too young to have created much value in the name you picked.

And the expense and distraction of getting into a trademark dispute with a more established better funded company can be substantial. So your best course of action is let it go. Let the name go. Pick a new name and get back to work. Related to this a few of you emailed the question about whether or not it's worth it to register your company's name and get the official trademark.

Generally we consider trademark registration to be something that can wait. It's a nice to have and not a need to have in the early days of your startup. All right finally. I picked an awesome name for my company but I have to pay 10K to get the domain. This happens a lot. So again don't fall in love with a name that may cause you to make bad decisions no matter how great that name is.

It is a bad decision to waste time getting into a lawsuit with a company that claims you stole its trademark and it is usually also a bad decision to spend a ton of money on a domain. So do your research on names. Don't just research the PTO. Research it and then do whatever is cheapest and most efficient and move on. Okay that's it.

So now we're gonna have John and Jason come up and we, okay so what we did is we took, you guys emailed us a bunch of questions and we pulled some out. We edited them a little bit for brevity but we mostly kept them sort of unfiltered original style so we're gonna go through a bunch of those now. Okay Jason I'm gonna ask you the first question when you're ready. Go ahead. Okay.

When does the 30 day IRS clock for filing an 83B election start and you might wanna just start by describing what an 83B election form is in case somebody here doesn't know.

Yeah so an 83B election is a tax election so when you buy stock, if you don't make an election what happens is you're taxed on the stock as it vests so each vesting period, whichever the amount of stock that vests, whatever the value of the stock is at that time you incur an income tax for that.

But an 83B election allows you to be taxed on the difference between the value of the stock and the price that you pay for the stock on the day that you actually buy the stock so it's actually by default in most cases the best thing to do when you are a startup founder is to actually make the election so that because you're gonna be paying a very nominal price for your founder stock and so there's gonna be no income taxes because you're gonna be, if you make the election because you're gonna be paying the same amount so you'll pay like a dollar for your stock and then basically say that the stock is worth a dollar and then you make the 83B election and then there are no more taxes that are gonna accrue on your vesting as the stock grows in value.

So if you don't do that, which does happen from time to time, you can be faced with a very large tax liability if your company ends up becoming very, very valuable as your stock vests and the time period from when the 83B election, the 30 day period that you have to make the filing, it starts from the day that you actually buy the stock.

So that is a hard deadline, it includes calendar days, it's not a business day period and if you miss it, there's really not much you can do about it. There are some sort of things that you can do to mitigate the tax liability when if you work with tax lawyers but if you miss it, it can be pretty bad. So that's one thing to definitely remember.

Okay, and I will add that this is a good reason to pay really careful attention to the date on your restricted stock purchase agreement and it should be the same date that you write the check for the $1. You just pay attention to that. Like you want that all happening on the same time so you're not really worried about like, oh my gosh, what's my actual start date?

And the other thing I'll say about that is 83B election forms need to be saved by the company as well. So the individual founder is gonna save that election form for their own tax returns and their own files but the company needs to keep a copy too.

You put that in your shared Dropbox, you make sure it's signed, you make sure it's dated and you save it in that safe place and the company has it forever. That's really important. It's one of the few things that can't be fixed. That's also an important. Well yeah, I mean Jason was just saying like there are some fixes sometimes but they're painful and really expensive.

And people look at it in diligence. It's actually one of the few things to remember. If you remember nothing else from this, file your 83B election forms. Okay, so we also got a lot of questions that touched on a variety of immigration issues. So and here's a sample question we got. I'm in Canada, can you help me get a TN visa so I can work on my startup in the US?

John, why don't you take a crack at that? This is a difficult, Jeff said we know everything but immigration's not something that we're experts on and this is a situation where you need to speak to an expert.

Especially if you have situations where you're going to be, you need to be employed as Carolyn was saying earlier by your company and if you can't work in the US, you can't be employed because it's illegal then you're better off speaking to an expert. Now immigration's particularly tricky.

It's a political issue obviously now so the landscape's always changing but it's also, it's more of an art than a science. So it's always been very difficult for us jumping in, knowing the basics to talk about immigration. We're really not experts in this area and you definitely need to speak to an expert. Yeah, okay. Jason, should I be a C-Corp or an S-Corp?

C-Corp, so if you just file in Delaware you're kind of C-Corp by default. In order to actually be an S-Corp you have to make an election on a tax form and the difference between the two of the C-Corp or S-Corp is S-Corp is pass-through taxation so it's tax transparent. So any income earned by the corporation is then passed through to its owners.

A C-Corp cuts off the income at the level of the corporation and the corporation pays taxes. And so the reason why you wanna be a C-Corp is that's the kind of entity that investors are used to investing in. And also when you actually take investment from outside investors it will blow the S-Corp election most of the time anyway. Okay.

John, how much equity should we save for our first employees or key hires during the incorporation of the company? That depends on the size of the company and how many people you need to hire. I would say the standards are probably 10 to 20% people think is going to be saved for employees but it's definitely specific to the company.

So I would, this is a situation where it's very easy for me to say, hey you should be very generous with your employees and have alignment and make sure they're benefiting from the upside in the company. It is something I believe very strongly and especially if you have good employees. You wanna keep them, you want them aligned with your mission.

So it's worth thinking about this in a long-term view, having a long-term view and setting up everyone for success. The online platforms, Clerky and Stripe Alice, well I know Clerky for sure, you can actually create a stock option pool at formation if you want to. So if you've already thought that far ahead and you know you wanna have a plan set up, you can do that at formation.

I would say though the vast majority of companies actually wait and don't adopt a stock option plan until they're a little farther along. Jason, is it illegal to have unpaid interns? Generally yes. So you just went over this in the fundamentals. So you wanna avoid unpaid employees. Interns are gonna be generally considered employees.

And then there are some exceptions you can use or take advantage of for giving people sort of college credit if they're college interns or things like that. But that's gonna take some work on your part to actually learn those rules and you're probably gonna need to talk to a lawyer for those things.

And if you want to get the help of people and just pay them in the form of equity, again that was already covered by Carolyn's presentation. They could be contractors but there are standards for when somebody is classified as a contractor versus an employee and those standards got just recently more, are harder to satisfy given some of the California Supreme Court rulings.

We had a YC company once that had 14 interns. 14 unpaid interns, that was a big mess. Okay. John, there's a ton of advice out there for how to properly structure for a non-profit, for a for-profit startup. What about non-profits? What's the best legal practices for starting a non-profit startup? I'm getting all the questions that I can't answer. That seems fair.

Non-profits are also completely different. It's a different animal. It's different from for-profits. I mean the government doesn't favor non-profits because the government likes to get taxes. Non-profits are tax-free. So if you think about it, the government's going to make it difficult to become a non-profit. You have to go through all these steps and fill out forms. It takes like nine months.

I'm not an expert on it. YC's not an expert on it. We do donate to non-profits. We accept non-profits in our program. That said, it's always been, you have to have a public good. Your company has to be set up for the public good. There are certain disclosures you need to make. You have to disclose the top five salaries in the non-profit.

And I'm certainly not an expert in this area, so I don't want to touch on it anymore. But it's a completely different animal. You're out there soliciting donations from foundations rather than raising money from VCs. So it is a totally different beast. Jason, can I invite a stranger to be a partner? So that question probably answers itself.

Generally, you want to work with people that you can trust and know. And so before you bring on somebody as a partner or co-founder, you kind of want to understand how well you're gonna work together, whether you can actually build something together, whether you're gonna actually get along. So I think the answer to that is not, if you really want to make sure that you're gonna be successful.

And even if the person who asked this question meant partner-like advisor, or some other, not like a co-founder, but they meant something else, I would say don't ever work with a stranger, right? And this goes back to what I was saying about founder breakups. I mean, that's a recipe for disaster to work with someone you've only just met. Because we've seen brothers break up.

Like the founder breakup goes through all levels of relationships. So you're gonna stack the deck against. yourself if you have a stranger involved. John, what are key factors to consider while determining what country should one register their parent company in? The quick answer is where's your market, where's your business, who are you, most people set up in the U. S.

because they're attacking the U. S. market, which is a big market. If you're selling something in India, you should be in India, most likely.

The problem with this question, like the parent subsidiary question to me, I always think, like when I'm talking to startups, keep it simple, like get, you know, this lecture seems a little dry, and it's a little, you know, it's the legal mechanics, not the most exciting thing, but it's really pretty simple if you think about it.

It's like, hey, you know, form your corporation, keep it, be serious, keep your documents, like don't have one person squirrel it away, buy your stock from the company, never forget your 83B, that's the one thing I wanna drill home, you know, after you buy your stock, you file your 83B, that's about it, like there's not that much to do as long as you're serious.

With parent subsidiaries, complexity, when I hear that from companies early on, I just wanna run. You're gonna make it extra hard on yourself with that kind of stuff. Jason, with the explosion of legal services tech, it's possible I may not need traditional counsel until a sophisticated angel or institutional round.

When do you advise your companies to stop using these services and migrate to a traditional law firm? How would you distribute the work between the two? Yeah, so there are a lot of good tools out there right now.

So you could use Clerky, you could use Stripe Atlas, you can get pretty far with them, and, you know, I think when you get to the point where you're raising significant amounts of capital, you definitely should get a lawyer, because a lot of the agreements are gonna be custom and bespoke, or there's gonna be some negotiation.

When you're just incorporating and setting up, those services will take care of it. You could probably go without counsel. You could certainly get counsel if you want, especially if you wanna do something a little bit more custom.

When you get to the point where you're issuing stock to employees, you probably do wanna get somebody involved just because there are some things that can go wrong if you don't do things perfectly. And you also don't want to be careless about having written promises for stock with various people.

So sometimes outside counsel there can be very helpful in making sure you're not out over your skis when you're talking about things like that with people. So John, this question is kind of similar to the one I just asked you, so it's probably the same answer, but you can reiterate. From a legal perspective, can I form a startup and then sell it while having a full-time job?

If so, what things should I consider? I also think Jeff touched on this earlier, but this is kind of asking the impossible. There's no way, or I've never seen any company started part-time on weekends, holidays, become like a giant company. Maybe you can do that on a small scale, but we're asking you to start a company out of thin air and that is very difficult to grow a giant.

This is an all-consuming, full-time thing. It's not like, oh, I'm gonna do this as a hobby. So I don't want to sound dismissive, but I just think that's practically impossible. I wouldn't even think that way. This isn't a part-time gig. Jason, are patents ever worth applying for?

So this is sort of like, you could talk a very long time about patents and whether it's useful or worthwhile applying for them. The short answer is, so patents are useful for protecting your technology, especially from competitions and copying your technology. Your technology matters. If you're pursuing a software startup or tech-enabled internet company, patents tend to matter less.

There's less protection under patent law for software or patents anyway, and most of your success is gonna be determined not by their protectability of your property under law, but rather your execution under the software. If you're pursuing a life sciences startup, their duplication is actually easier for competitors to execute on. So patents tend to be more important.

And if you have questions about the specific things that you're doing technology-wise and whether it falls into the weak patent or strong patent protection bucket, you should definitely consult with a patent expert or a lawyer on that. But the last part of this is that no company has sort of raised money purely on the strength of their patent portfolio.

It's always gonna come down to how good is the founding team? Can they execute on their vision? The patents are just one part of the puzzle. John, I'm thinking about setting up an advisory board and wonder if advisors should have equity. In my experience, advisory boards are more a non-US thing, like non-Silicon Valley thing.

Maybe in Silicon Valley we see advisory boards for life sciences companies. You would see academics and professors try to legitimize the company as advisors and get a little stock. But this is not something where, it's not something where you give stock to people without thought. It's more, I think the best quote on advisors somebody said was like, advisors are investors who want stock for free.

And that's kind of how I think about it. People should invest, ideally, instead of advising for free shares. And I know this isn't a one size fits all. Some situations, like I was saying, it's appropriate, maybe a life sciences company. And you can have consultants who get stock, but it's mostly a situation I try to avoid.

Jason, what have you seen founders do when they had to cut off and fire a co-founder who was a personal friend? So has anybody here ever had a roommate who's been a friend? It's kind of like that, right? So sometimes it's better to not do certain things with your friend so that you can stay friends.

And so if you have started a company with a friend of yours and it's not working out, and it's oftentimes because you guys have different ideas about the direction the company should go in, or somebody's working just a lot harder than the other person is, it's usually better to just solve that problem, or basically resolve that problem as soon as possible, rather than letting it be something that you think or hope will work out over time and letting it fester.

Because not only does it hurt the company, it hurts the friendship too. So it's generally better to kind of get to a quick resolution. Yeah, you don't want to stall on that. That's something I would add. The biggest mistake we see is people delaying and thinking, oh, things are gonna work out, and this is a friend, and things are gonna change.

It's usually best that you just end the relationship if it's not working. And the startup relationship. The startup relationship, thank you. But hopefully preserve the friendship. Preserve the friendship, exactly. Okay, John, what is the best methodology for reviewing potential loopholes in your privacy policies in terms of service?

This is an area where if you're going to spend money early on on a lawyer and you have something that's tricky, that's a sensitive startup topic, it's worth spending money on a lawyer. But there are excellent services for privacy policies in terms of service on the internet right now. IU Benda's one, and all the major law firms also have privacy policy generators.

But if there's something specific, IU Benda, I'll send out on the resources tab. It's definitely important. It's required if you're taking somebody's information. You have to have a privacy policy up on your website or your app in California. So this is something you need to do. There are good services in certain circumstances you're gonna need to hire a lawyer in this situation.

So as many of you probably know, if you are collecting personally identifiable information from anyone in the EU, you're governed by the GDPR, and that's a huge quagmire.

And so if you fall into that bucket, even though some of these privacy policy generators are fantastic, they're not gonna get, they're probably, I mean, unless someone's really done a great one, they're probably not gonna cover all the stuff you need to know for GDPR. So you would probably wanna get a lawyer for that. Let's see.

Jason, should we work 18 hours a day as a co-founder and founder of our startup? How can we measure and manage our commitment status for our product? So the advice we give all of our startups is to still exercise, sleep, and have some semblance of a life in terms of maintaining some of your relationships and friendships.

So 18 hours a day is not something that we would recommend, really, except for maybe short sprints where you need to get something out. And just remember that this is just gonna be a multi-year journey where you're building a company. So to use a tired cliche, it's a marathon, not a sprint. You don't wanna get sick.

Okay, John, should we have a shareholder agreement and what should be included in a good shareholder agreement? Shareholder agreements are really a non-US type of document. It's a document that describes in detail what happens when there's departures, severance, founder breakups, or all different types of situations. And often they can be very detailed.

The ones I've seen, Canadian companies have come in with them. It's really a foreign thing, not so much a US. Goes back to what we were saying, or what I was saying earlier, you wanna keep things simple. There's no reason to have this giant prenup in a situation for a startup. I mean, chances are if things go wrong with a startup, there are no assets to divide anyway.

It's not like a marriage, using the prenup analogy. Except when you break up. Except when you break up in a marriage, there are assets, hopefully. There's a house, couch, television, whatever. You need a prenup sometimes. For startups, these detailed documents that I get from the Netherlands about what happens when a company breaks up with no assets seem just like a waste of time to me. Overkill.

To clarify for some people, so I think the person who asked this question was talking about the shareholder agreements that John was talking about, which is among founders. When you sell preferred stock to investors in like a series A financing, there are shareholder agreements, and they do govern a lot of the things that he just talked about, but that's between the company and the investors.

So that is different, and that is, of course, a very US thing. So yeah, so just to make sure people weren't confused about that. Okay, our last question for Jason. Many companies have information about their rounds, like price per share or amount raised, displayed on PitchBook, CrunchBase, and other sites.

Given that this seems to be due to company charters and filings being publicly available, is there any way to prevent outsiders from seeing this detail about your company?

So the technical answer is yeah, there are methods you could use to actually conceal some of the information that the charters, the charters are publicly filed, documented, people can pay $100 or whatever to pull down the charter from Delaware and look at some of the details of your company.

So that's sort of like the literal answer, but I think the larger answer is just, it's not something that I would worry about really, because it's sort of way down on the list of priorities in terms of what you need to sort of think about and plan for. And look, there are plenty of companies that have this information listed on PitchBook.

They're doing fine, and plenty of others are not doing fine, because, and it's not because they're on PitchBook or not on PitchBook, it's because of other things. So it's just, I wouldn't spend a whole lot of time thinking about this. So Jeff and Adora, I don't know how we're doing on time and whether or not you want to do any, their Q&A. So, are there any questions? Shockingly, there are.

Why don't we take just a few questions and then we'll call it a day. Okay, all right, yes. Can you talk about B Corps? That goes back, I'm not an expert on non-profits. I don't think, oh, thank you. She's asking about B Corps, which is a quasi-non-profit and for-profit corporation, social enterprise where part of your mission is for the public good.

That's not something I'm an expert in, unfortunately. Many companies have been doing it recently. It's much more prevalent. I'm not really qualified to speak on it. It changes the fiduciary duties, right? So the whole goal of, I mean, the goal of your average corporation is you make money for the stockholders, right?

B Corp is more like there's a social good, so the fiduciary duties on the part of the management and the directors are different. And like John said, they're gaining in popularity, so I think we're gonna see a lot more of them. Yeah, it's not really YC's thing, so we don't, I would hesitate to give you any advice about them, but I know there's actually a couple good books about them.

I have one of them, I just haven't read it. But there's a lot of information out there about them. You know, if not for YC's, maybe, but it's- Could be fun. Yeah, it could be fun. We haven't done a lot of them, so we don't really have any data about what that looks like long-term. One point about a B Corporation is, as you can imagine, it might not be as attractive to your typical venture investor.

So it depends on what the goal is for the company. If you're looking to create a startup, which is high growth, fast growth, you won't generally see a B Corp, and most investors probably look at that somewhat askance. I will say, we do have one recently that converted into a B Corp that had been around for like five or six years, so that's something you could consider.

A consideration is, if you want to be a B Corp, do that before you raise money, so that your position is geared down, because a conversion later might be harder. Yeah, I mean, it can be done. I just don't know the wisdom of it. Way back here. I have a question. I have a SaaS company, and I'm registered in Australia, and I'm just wondering, should I register a company in the U. S.

as well, if I want to target the U. S. market? I do charge U. S. dollars, but I'm not a corporate company in the U. S. , and would it be beneficial to register a company in the U.

S. ? Because it's similar to the question you asked before. Yes, it is similar. The question is, I believe you have a SaaS company in Australia, and you're attacking the U. S. market, but you're also in Australia, you're not sure where to incorporate. Again, the key is, where are your customers?

It sounds like you're thinking about the U. S. , you're not 100% sure, and I would just figure out really where you want to be. Most, from a practical standpoint, again, setting up complex structures is really what the question that we were talking about earlier, and I have a little aversion to that.

It could be a good situation where it makes sense to have a parent subsidiary structure for you, but it's a little more complicated. And. .. State corporations in the U. S. can gain a lot from the U. S. market.

You can incorporate in the U. S. , and then have your Australian company be a sub. But again, you could just incorporate in the U. S. and just sell into Australia. You could just not, I mean, if that's your market and that's where you want to raise money, just incorporate and be a U. S.

company. We always suggest U. S. companies. It's much easier to fundraise in the U. S. , in much more favorable terms, in my opinion. So I always tend to push people to be in the U.

S. , it's just better for the business long-term. Just one issue at a time. Just two more questions. Two more questions. Okay, how about you, Becca? I have a question about the business schedule that you talked about earlier. If you add co-founders, it's a year after you start a company.

Do you have to restart the business schedule for all the shareholders, for all the founders? Or, in the same question, every single time you raise money, do you have to restart a company? Okay, so his question was, when you add new co-founders, like later on, maybe a year or so later, do you have to restart all the original founders' vesting schedule to match the new?

And the answer is no, you do not. So you put you and your original team of co-founders, let's say you put four-year vesting on your founder stock, and then a year later, you find a fourth co-founder. you think is great. And by the way, be a little bit circumspect about throwing the word co-founder around. Like sometimes that person who comes a year later is just a key hire and not a founder.

There's a lot of emotional attachment to the word founder in the Silicon Valley. We all know why. But like not everyone's a co-founder. Anyway, but to answer your question, no, you guys will stay on the same vesting schedule. The new person who came a year later will start four years on the day that he or she started at your company.

Now the thing that some of you probably already know is that when your investors come in, they may decide they want to restart you all. They would, I mean, unless you had absolutely zero leverage, they're not gonna start you back on square one. But sometimes investors look at your schedule and they say, ah, you guys only have about a year left. That's not really enough for us.

Can we put on another year? So that happens every now and then. And again, it depends a lot on leverage. But don't be surprised if that happens. Did that answer your question? Okay. Okay, I think we, one more. One more.

Someone else can answer. Someone else can answer. So you talked about having very simple structure. We have employers outside the U. S. And how do we pay those employers? How do we have them in the U. S.

entity if we don't want to register an entity in the foreign country? So the question was, how do you hire outside the U. S. when you have a U. S. entity? And how do we show them? Is it a contractor?

Are they employing? We want to give them staffs. We want to have them outside. They're not a U. S. employee. They're not U. S.

law firm. Yeah, so the short but unsatisfying answer is gonna be that it depends on which country. Because each country has different sort of rules for who counts as an employee and who counts as a contractor and what you have to do in order to actually satisfy those rules.

And then also, when you actually open up a significant presence in any sort of foreign country, what you oftentimes have to do is create a local entity. And sometimes that can be a subsidiary. And sometimes it can actually just be something more simple like a local branch. And again, your menu of options sort of depends on which country you're going into.

So, I don't know, do you have like a country specifically? Yeah, India. So India, typically what happens is there's a subsidiary that's created. It's usually owned 99% by the American parent, the Delaware parent, and 1% or some other small percentage by one or two local Indian sort of representatives. And then that subsidiary is the one that then hires employees in India.

Is it important at an early stage or can we somehow hack it in the early? So, I think if you want to try and avoid that kind of structure, I'm not an expert on Indian law.

You probably need to talk to somebody who actually has a license in India to actually advise on the employment issue because just like in the United States, various countries have stronger or weaker protections for when you can classify somebody as an employee or not. Okay. Thank you guys very much. So, sorry to have to cut off. I know there's a lot more questions live here.

Remember, Darby Wong from Clerky is having an AMA now, tomorrow, but it's open now, you can post questions. So, if you have questions, that is an outlet and you can always work with your group to ask more questions. Just one more word on the part-time question, which has come up a few times and we discussed a little bit at the break.

The way I look at that, it is certainly true that some companies are kicked off while people are working in a full-time job, but those aren't really companies yet. They're just projects, they're just ideas. Once you really start your company and all of the great companies have this feature, you'll be on it full-time. You'll be on it more than full-time. You'll be on it 120%.

So, thank you all for coming in person and thank you for watching online. Just a couple reminders. There will be a conversation with the founder of Y Combinator, Paul Graham, on Friday, as well as the AMA tomorrow with Darby. Next week, we're gonna dive into product with the CEO of YC, Michael Seibel, and David Rusenko from Weebly on building product and product market fit.

There are also several great videos in the Startup Library on product that I very much encourage you guys to take a look at. And lastly, log in to the site, many of you already have. Post on the forum, post in your group, and figure out how it works. Hopefully, it'll be a good home for all of you, and if you have any issues, send an email to ycombinator at startupschool.

org, and everyone have a great day. Thanks. Thank you. Thank you. Thank you.