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How to start a startup: Legal background for startup startup



Stanford course CS183B: How to start a startup . Started in 2012 under the leadership of Peter Thiel. In the fall of 2014, a new series of lectures by leading entrepreneurs and Y Combinator experts took place:

Second part of the course

First part of the course

Disclaimer: in this part of the course of lectures by a Stanford startup school, the features of Western legal practice are set out (which is logical). This example is interesting, since it vividly shows that the Russian practice is being developed by the efforts of FRIA experts in the same direction as the global one, borrowing and successfully adapting some solutions. We will certainly continue to acquaint you with such legal subtleties in our blog.
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Sam Altman: Kirsty and Carolynn will talk about the financial and legal aspects of working in a startup. This lecture may not be the most interesting, but if you learn this material, you will be able to avoid trouble in the future.

Carolynn: As Sam already said, in this lecture we will talk about some of the principles of a startup. Kirstie and I will talk about the main legal and financial problems that your startup may face in the early stages of its development.

In one of his videos, Paul Graham once said: "The founders do not have to know all the financial and legal features of creating a startup." I thought, “Oh, no! This is the name of our lecture. ”

In fact, Paul wanted to say that the founders do not need to go into the details of these processes, because it is quite dangerous. Anyway, Kirsty and I will not discuss this topic in detail. Our goal will be, at least, to convince you that you should not run a startup in Florida without thinking.

Kirstie: We were very worried that you would be bored listening to an accountant and a lawyer. Before us were amazing founders, and they covered very interesting topics. But, as Sam said, if you know all the basics, you can make the right decisions, avoid trouble and unnecessary trouble, and most importantly - focus on what is truly important to you - to lead your company to success.

We often refer to such a thing as a “startup”. Surely, you remember that any "startup" should be designed as a separate legal entity. On the features of its formation, we will talk a little more in the future.

In addition, you probably know that a startup has its own assets, intellectual property, inventions and other property that needs to be protected. We will touch on this issue, and then we will talk about how to raise funds, hire employees and enter into contracts.



Before you create your own company, you need to discuss with other founders some rather important questions: in particular, who will be responsible for what in the company, and what share of the company's shares each of the founders will have.

Carolynn: First of all, let's talk about the startup startup procedure. Each startup must be registered as a separate legal entity. You probably already know that the main reason for separating a company as a separate legal entity is the protection of personal property. If your company is sued, then no one can withdraw money from your personal bank account - only from the company account.

I'll tell you a short story. About two years ago, we worked at YC with a company originally registered as LLC [English]. Limited liability company, LLC in the USA] in Connecticut: this was recommended to the founders by their familiar lawyers.

When these founders came to YC, we said that they need to re-register in Delaware. Connecticut lawyers began to process re-registration documents and, unfortunately, made an obvious but very serious mistake. They discovered her when they attracted a very large amount of money. For two years, the founders of the company thought that it was registered in Delaware, although by securities it was still listed in Connecticut.

Let me just say that in order to clarify the circumstances of this case, four law firms were involved: two from Delaware, one from Connecticut and one from Silicon Valley. Today, the fine for improper re-registration is $ 500,000.

The conclusion is obvious - do not complicate anything. We register all companies from Y Combinator on the same principle, because it's easier. If you are not wise, you will save a lot of time and money.

Kirstie: How can you create a company after you decide to register it in Delaware? It is necessary to perform a number of specific actions. The first is quite simple: you simply send two sheets of paper to Delaware by fax, which says that you are going to create a company.

At this stage, the company does not yet have its assets, and so far nothing is happening in it. After that, you fill out a number of documents establishing, among other things, the internal rules of the company. They contain the names of members of the board of directors and company management. If you are registering a company in Delaware, the documents must include the names of the executive director, the president and the chief secretary.

In addition, at this stage, you should fill out documents that confirm that your company has inventions or software created by you as an individual and owned by the company. Remember that at this moment it is desirable to decide what you are doing on your behalf, and that on behalf of your company, which is a separate entity. It is very important to see a clear difference here.

There are many services that can help you register your company. Of course, you can contact one of the law firms, but besides them there are online services that provide the same services. When working with companies from YC, we often use a service called Clerky, where all standard documents are filled for you, so you can not worry about anything and focus on what is really important to you.



Note: Petersburg developers launched a legal assistance concierge service - yurburo.ru. YURBYURO is a full-fledged platform for creating legal services. At the moment, the team is a resident of the Accelerator of the IIDF and participates in the reality show " Candidate for takeoff ".

It is worth noting the importance of these documents, because they indicate what your company is and what it does. It is very important that all documents are kept in a safe place.

It sounds trite, but some founders do not pay enough attention to this. They do not know what is indicated in their documents and where they are located. No one argues that paperwork is far from the most interesting part of doing business.

Those moments when your documents are of great importance turn out to be one of the most intense in the life of a startup. Surely, they will play a certain role when you attract investments in Round A or during the acquisition of your company. You will have to carefully examine all the documents, because they will work with professional lawyers. If you do not know where your documents are stored and what is written in them, any stressful situation will become even more tense for you.

The main thing is to keep your documents in a safe place and in a strict order. So you save yourself from unnecessary work.

Carolynn: Now a few words about the financial component of a startup. First, let's talk about the distribution of company shares. If the value of your company's shares is high, then the question arises about the share of each founder in the company. If you - the only founder in a startup, then you can not think about it. But if the founders are two or more, the question becomes quite acute.

First, it is important to understand that the actual implementation of an idea is more important than the idea itself. In many startups, too much attention and, accordingly, too much of the company’s share goes to the founder, who invented the idea for a startup. No doubt ideas are important, but in themselves they do not cost anything.

Have you ever seen someone pay a billion dollars for one idea? The company's value begins to grow only when all the founders are working on the realization of the idea. You should not succumb to the temptation and give an excessively large share of the shares to the founder, who is the author of the idea for the company.

Secondly, you need to think about whether to distribute the company's shares evenly among its founders. In our opinion, it is quite obvious what it costs. The shares of each of the founders do not have to be equal, but if they are very different, this should be alarming.

We are often interested in the opinions of the founders about the inequality of shares in a company. Perhaps one of the founders believes that a startup will not live long. Perhaps someone overestimates their contribution to the work of the company, their education or their previous experience. Do the founders trust each other? Do they openly share their thoughts about the startup and its future? If the shares of the founders in the company are very different, then we start to worry about whether they get along with each other.

Thirdly, in a startup it is very important to look into the future and not look back. In other words, each founder should give all the best for 100%. Everyone should ask themselves if he is ready for a long journey. If everyone in a startup thinks that each of the founders must invest all their strength in the work throughout the entire journey, then everything that happened before the company was established has no meaning.

It doesn't matter who had the idea, who was developing, who was working on the prototype, and who has an MBA degree. The whole team will be better if the share of each will be the same, because the whole team will implement the idea. To this we can add that among the best companies of YC, that is, those whose estimated value was the highest, there is not one where the shares of the founders differed significantly.



Kirstie: You and the founders discussed how you would distribute the shares in the company. What's next? Very often, the founders are surprised that they need to do something else to get hold of their shares. It seems to them that their conversations solve something. In fact, you are considered not only an individual, but also a representative of the company.

You can imagine a similar situation in a large company: if you work at Google, and you were told that you will receive part of the salary in the form of shares, then you can assume that you have to sign some documents for issuing a share package. If this does not happen, you will think that something is wrong here. The same is true in a small company.

In this situation, you must sign a contract for the sale of securities. You as an individual are buying shares from the company. And when you buy something, you always enter into a two-way deal. In this case, you can get shares if you either pay cash for them, or you give the company your intellectual property, inventions, or developments. Thus, everything that you have done in the past is actually owned by the company.

Such actions are also called limited, because the rights to them can be obtained only after a certain period. In the future, we consider this question in more detail.

If we talk about the process of granting rights to shares, then it is worth mentioning one very important document, about which we constantly reiterate to everyone, because the consequences may be irreversible. At one time, due to him, several deals were thwarted.

We have noticed that some companies do not fill out the so-called 83 (b) Election form, and this often leads to a failure of the transaction. I will not go into details: I will only say that the amount of taxes that you pay as an individual and as a representative of a company depends on this document, and this can seriously affect your business.

Therefore, the main thing is to fill out all the documents, in particular, the agreement on the purchase and sale of shares and the tax form 83 (b) Election, as well as to make sure that you actually submitted these papers for consideration. If you are unable to prove this, you will have problems with the tax service (IRS), and investors and companies interested in acquiring your startup will not enter into any transactions with you.



Carolynn: Next we will talk about the process of granting rights to shares, or vesting. As you know, under the vesting understand the process of acquiring the rights to the shares after a certain period of time. Here we are talking about promotions that you acquire from your company and that give you the right to vote. However, in the event that you leave the company before the expiration of the term of the auction, your company can return to itself these shares. This type of stock is also called limited, bearing in mind that shares are in the process of vesting. The tax authorities usually say that such shares are “refundable”.

What is usually the term of westing? In Silicon Valley, the so-called standard term for the West is four years with a cliff [Eng. cliff - the period after which the employee receives the accumulated amount of shares] in one year. This means that in a year the founder becomes the full owner of 25% of his shares, and he receives the rights for the remaining 75% every month for the next three years.

Imagine that at Christmas the founder buys a stake, and the next Thanksgiving, that is, before the expiration of one year, leaves the company. In this case, the founder has no rights to these shares, since he left the company before the expiration of the period of the cliff. If the founder leaves the company one day after the next Christmas, that is, after one year and one day, he or she gets the right to 25% of the shares, since the term of the cliff has expired.

What happens to stocks after the founder leaves the company? The company can redeem these shares. In our example with the founder, who left a year and one day after the acquisition of shares, the company must repurchase the remaining 75% of the shares.

How? The company will simply write to the founder of the check: just as the founder got these shares. The check indicates the same value at which the founder acquired these shares. Thus, it turns out that the founder simply returns their own money.

The question arises: why do we need Westing? The importance of this procedure is connected with the departure of the founders from the company. If there were no vesting, the founder, after his departure, would take with him a fairly large share of the company's shares. Of course, this would be unfair to his colleagues. We will talk more about this when we touch on the founders' wages.

In addition, Westing stimulates the work of the founders in a startup. If the founder can leave the company at any time with his share, then why stay in it at all and invest your time and energy? After all, work on a startup requires titanic efforts.

Do we need the sole founder in the company? It is necessary, because he also has an additional incentive to work. Investors want all founders, including individual ones, to be interested in long-term work.

The presence of Westing in single-founder companies is also an example for other employees. You can imagine how foolish it would be if the founder starts telling his employees that within four years he should get the rights to his shares, when in fact he really needs these shares.

Westing affects the company's corporate culture: a founder who needs to get shares rights sets the pace of work for an entire startup when he says: “You and I are set to work for a long time, we are all going to get the rights to our shares, and we will do it together” .



Kirsty: Moving on. We have correctly registered the company. Each has its own share of shares. All standard paper work is complete. Now what? The next stage in the development of a startup will be to attract funding.

In previous lectures, several investors and founders have already shared their experience in raising funds. If they talked about strategies for obtaining investments, we will tell you about the execution of the necessary documents and what to do when someone is ready to invest their funds in your company.

As for attracting financing, then two cases are possible: either the cost, which investors are guided by, has been established, or it has not been established. Under the cost refers to the valuation of the company. In principle, investment rounds can be called whatever you like, but, as a rule, if we are talking about a sowing round, it means that the cost has not yet been established. In the so-called rounds A, B and so on, the cost is already determined.

If there is no information about this value yet, then it is easier to get money. This operation is carried out on the basis of an agreement on a special form of convertible loans, which in English literature is called Safe.

And again two parties take part in the transaction. The document stipulates that, for example, now the investor pays $ 100,000, and in return receives the right to receive shares in the next round, when the value of the company is already known. It should be noted that after the paperwork, this investor is not a shareholder and therefore does not have the right to vote in the company. He will have other rights that Carolynn will separately tell about.

It is quite natural that investors want to get something in return when they invest their money at the very early and risky stage of the company's development. And here it is necessary to mention such a concept as the assessment of the company's capitalization, which, I am sure, many have heard.

During a round with an unidentified company value, a document must be signed stating the amount of capitalization during the conversion of shares. However, it differs from the current company valuation.

The capitalization estimate is the upper limit of the company's value, which is later used to calculate the number of shares owned by the investor. Suppose an investor provides a company with a convertible loan of $ 100,000 with a capitalization of $ 5 million.

If in a year the company manages to attract investment in assessing its value of $ 20 million, then the cost of one share for the first investor will decrease about four times. Thus, an investor will be able to buy about four times as many shares as if he invested the same amount in round A. Thus, an investor can benefit from investing before others.

Source: https://habr.com/ru/post/296848/

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