Startups
Lecture 18 - Legal and Accounting Basics for Startups (Kirsty Nathoo, Carolynn Levy)
youtube.com/@ycrootaccess
20 Nov 2014 · Startups
48 min watch → 1.5 min
Startup legal and accounting basics include forming a Delaware corporation, splitting and vesting founder equity, handling SAFEs and dilution, paying payroll correctly, assigning IP, and keeping records organized for fundraising and hiring.
Startups should usually form as Delaware C corporations and keep records complete, because investors expect standard documents and one bad conversion created $500,000 in legal bills.
Founder stock should usually split roughly equally and vest over 4 years with a 1-year cliff. Founders and employees must be treated as workers of a separate company.
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A corporation is a separate legal entity that protects founders from personal liability.
If the company is sued, claimants usually pursue company assets, not founders' bank accounts.
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Forming a Delaware corporation requires more than filing.
01
Adopt bylaws.
02
Appoint directors and officers.
03
Assign inventions and code.
04
Make the company own its IP.
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Founders must separate personal actions from company actions.
The company, not the founder personally, must own assets and sign agreements.
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Founder ownership is not created by conversation alone.
Each founder signs a stock purchase agreement and buys shares with cash or contributed intellectual property.
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An 83(b) election is a tax filing for restricted stock that vests over time.
Missing it, or losing proof, can damage taxes and kill an investment deal.
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Founder stock should usually vest over 4 years with a 1-year cliff.
Vesting stops someone who leaves early from keeping a large ownership stake.
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0%
A founder keeps 0% if they leave before 1 year under a 4-year vesting schedule with a 1-year cliff.
After 1 year and 1 day, the founder keeps 25%.
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Founder equity should usually be split roughly equally.
YC saw zero top companies with significantly disproportionate founder splits.
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Early fundraising often uses SAFEs or convertible notes, not priced stock rounds.
Investors give money now for stock later, when a priced round sets valuation.
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4x
A $100,000 SAFE on a $5 million cap gets about four times as many shares as $100,000 invested in a $20 million priced round.
A valuation cap rewards early risk.
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45%
Founders can give up about 45% before growth if $2 million of SAFEs convert at a $6 million cap and new investors buy 20%.
Low caps plus large SAFE totals create heavy dilution.
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Fundraising and acquisitions often demand these records.
01
Incorporation papers.
02
Stock purchase agreements.
03
Signed 83(b) elections.
04
Financing documents.
05
IP assignment records.
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Startup money should pay business expenses only.
Payroll, rent, hosting, and customer acquisition qualify. Personal spending misuses company funds and is not tax deductible.
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Workers must be handled like real employees of a separate company.
01
Pay wages and payroll taxes.
02
Classify employee or contractor correctly.
03
Issue W-2s or 1099s correctly.
04
Assign IP to the company.
05
Follow employment rules.
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Employees must be paid at least minimum wage.
In San Francisco, the lecture cites about $2,000 a month, plus workers' compensation insurance and US work authorization proof.
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When firing someone, act immediately.
01
Communicate clearly.
02
Pay wages and accrued vacation immediately.
03
Cut off physical access.
04
Cut off digital access.
05
Repurchase unvested shares right away.
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Lecture 18 - Legal and Accounting Basics for Startups (Kirsty Nathoo, Carolynn Levy)
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