Startups

Things To Keep In Mind

Things To Keep In Mind

• you can't convince, you can show

• don't play the last card of your deck

• trust nobody, profit is forever

• take on other's shoes

• minimalist product

• document everything

• worst thing will happen, prepare for it

Startup Legels

Resources:

• Clerky Handbook: Legal Concepts

• Clerky Handbook: Incorporation

Services:

• Incorporation: clerky, stripe atlas, anglelist

• Payroll: Gusto

• Insurance: ?

• Bank/Bookkeeping: mercury

• Tax: turbotax, taxact

Sure I can go to Gusto and they can do payroll for me, but they don't do taxes. They don't do insurance. They don't do bookkeeping. And so on.

Readings:

• Startup Incorporation for Founders: A new handbook

• Stripe Atlas: the first five years and 20k startups

Personality:

• 平民公主: 非正常手段上爬 (!)

• 乖乖女: 保護

• 女武神: 軍事, 改造周圍

• 赤練仙子: 董明珠

• 女祭祀: 老師

• 魔法少女: 藝術

• 草原女剑客: 隨性自由

• 占卜師: 看透一切, 與世無爭

• 贵族长女: 眼界與執行力

• 女魔王: 利用人, 出生高

• 农场姑娘: 類似草原女剑客, 但不豪放, 小資

• 笑面掌櫃: 胖生意人

• 沉默猎手: 製造使用技術工具, 獨自行動, 隱蔽, 通過技術快樂 (非學者) (!)

• 鬣狗: 害怕丟失孩子/配偶控制權

• 足球隊長: 體育成就, 陽光好勝, 成年生存難, 解決事情靠蠻力, 靠哥們兒

• 藝術家: 追求名望, 而非金錢, 遊離於社會之外 (!)

• 流浪樂手: 叛逆, 音樂人

• 海賊王: 靠團隊生活

Legal Concepts

This section is dedicated to Delaware C Corp.

Person:

• Legal Person: can be non-human (e.g. corporation)

• Natural Person: human

Corporation: corporation is a type of company. Company is a generic term used to refer to a business, and does not imply any specific type of legal entity.

Ownership: determine rights to vote, dividends, and money get when acquired or IPOs

Certificates of incorporation (articles of incorporation, charters, COI): document you file with a state in order to incorporate a corporation (See Here)

• registered agent (agents for service of process):

  • must be physically located in Delaware, receiving legal and government communications (online services avaliable).
  • online services: can give you address only for communications from the Delaware Division of Corporations and court-related notices, so you need a separate business address. Whenever asking for address, use your business address.

• filing agent: make filings with government agencies (online service avaliable)

• incorporator: usually the founder, main purpose is to write rules to establish company

  • signer of COI
  • elects the initial board of directors after COI filled
  • Action of Incorporator ((Initial) Action by (Sole) Incorporator): incorporator adopts bylaws (specify company operations, rarely customized. Changing the bylaws of a corporation requires approval of either the board or the stockholders.) for the corporation, sets the size of the board of directors, and elects the initial board of directors.

• board of directors (board): governing body of a Delaware corporation

  • director: individual in board of directors. A job title consisting "director" does not mean you are on board
  • 1 ~ some maximum defined by bylaws, but usually the maximum is setup to allow changes
  • The number of directors can never exceed the size of the board.
  • make decision in meeting or writing
  • default: can make decisions with a majority vote of the directors present in a meeting (always having an odd number of directors is good)
  • writing concent is easier for startup because it doesn't involve a set of rules to make meeting valid
  • quorum: minimum number of directors, defined by bylaw
  • Once a corporation issues stock, the stockholders control who is on the board of directors.

• COI customization

  • incorporator
    • address: Some incorporators use a P.O. box or private mailbox service to avoid putting their actual street address.
  • corporate name: (1) be available using search tool, (2) contain a corporate suffix, (3) not contain restricted words, and (4) not violate other naming rules
  • domain name and trade mark avaliability: use attorney or USPTO website. Register after incorporation so that you don't have to transfer ownership of trademark
  • director: don't include director for more flexibility
  • effective date: usually immediately, or avoid paying franchise tax for the current year
  • registered agent: physically located in Delaware (CSC, CT Corp, Incserv, and Vcorp)
  • filing agent: make filings with government agencies, usually the same as registered agent
  • type of corporation: regular (general) or public benifit corporation
    • simply because a Delaware corporation is a public benefit corporation doesn't mean it's also a B corporation. B Corp involves an extra step of certification by B Lab
    • Both regular and public benefit corporations can be either C corporations or S corporations.
    • C Corp, S Corp election: By default, all corporations are taxed under subchapter C and are referred to as C corporations. After incorporating, a corporation can make an election with the IRS to be taxed pursuant to subchapter S instead, making it an S corporation.
  • type of stock: only specify common stock, as preferred stock should be negotiate with investor and amend COI anyway
    • "blank check preferred stock": although can allows the company to issue preferred stock without having to set its terms, investors don't like it. It is common for public companies to have blank check preferred stock.
  • number of authorized shares: typically 10 million for easy calculation and resolution. 5,000 shares (0.02% precision) is also used to minimize the Delaware franchise tax for small business. The difference in franchise tax is usually around $225 ($400 compared to $175). While fractional shares are technically possible, they are uncommon and add undesirable complexity to legal paperwork as the cost of stock split can easily be greater than franchise tax. There are two methods for calculating franchise tax:
    • Authorized Shares method: default, tens of thousands of dollars when authorizing 10 million shares
    • the Assumed Par Value method: usually used by startups with 10 million shares
  • par value of the shares: the minimum price at which a corporation can sell its shares to its shareholders. Almost always either $0.0001 or $0.00001.
    • has the effect of setting the lowest possible per share fair market value
    • Because a higher fair market value means equity compensation will be worth less, startups typically consider setting a higher par value undesirable.

• File-Stamped vs. Certified Copies

  • file stamp: the stamp in the first page of COI in PDF created by Delaware Division of Corporations
  • certified copy: include a cover page (w/ authentication code verifiable online) where the Delaware Secretary of State certifies that the attached file-stamped copy is indeed COI. Only valid if sent directly from Delaware Division of Corporations. You don't need the authentication code since you can look up the date of incorporation for any entity from Here

Not all companies are corporations, and you can only incorporate corporations (not LLC)

Fun facts about company name:

• you don't have to do ALL CAPS, INC

• you can form a company name in capital letters, lowercase letters, or a combination of the two

• in addition to capital and lowercase letters A-Z, numerals 0-9, Delaware will also accept the following symbols and punctuation (but not recommended, especially when obtaining an EIN/Federal Tax ID Number as the IRS will not recognize certain symbols in the company name.)

! “ ” # $ % & ’ () * + ,- . ? / \ : ;@ { } [ ] ~_^ ` |

Officer:

• appointed by the board

• Most startups: at least CEO, president, CFO, treasurer, secretary

• In early stage, CEO=president, CFO=treasurer. But they all can be one person.

• Under Delaware law, you don't need officers. But if you operates in another state, other states may require.

Security: include stock, stock options, convertible notes, safes, etc.

• convertible notes (convertible promissory notes): promises issued by corporation to pay a specified amount plus interest to the noteholder at maturity date. And convertible notes will be converted to something else (preferred stock) upon certain event (next round of equity financing, acquired, IPO).

  • maturity date: if the note has not converted by its maturity date, company must repay the price at purchase of the note plus interests. Usually, both party will spend energy to extend maturity date. (Often, the terms of the note specify that the corporation does not have to repay the note unless investors specifically request it. In some states, there may be lending regulations that limit how far out the maturity date can be set.)
  • designed originally for bridge loans (for survive til next round of finance), not for equity financing
  • valuation caps: same as safes
  • discounts: same as safes
  • interest rate: although not intended by both party, a interest rate must be set
  • selling convertible notes is called convertible note financing.

• safes: simple agreement for future equity, created by Y Combinator. Like convertible notes, safes can convert into preferred stock.

  • types: safes with a valuation cap, safes with a discount, and safes with both
  • valuation cap (conversion caps, target valuations): if the valuation cap is lower than the valuation for the next round equity financing, the valuation cap is used to calculate the number of shares for safes to convert to. The lower the better for investors. Price is determined by $V_{\text{cap}} / \text{fully-diluted capitalization}$ (price / n-"used"-share = price per share).
  • percent discount: a certain percentage discount compared to the next-round equity financing
  • post-money valuation cap: fully-diluted capitalization will excluding safes and convertible notes when using (pre-money) valuation
  • post-money valuation cap: fully-diluted capitalization is calculated including them (usually lower price per stock)
  • Valuation Cap & Discount: when both used, the more investor-favorable method is used.

• preferred stock: equity financing, since preferred stock is a form of equity.

• stock option: allows people to purchase common stock at a fixed price (exercise price, strike price)

  • optionees: people who own stock option
  • exercising: exercising the rights to purchase
  • someone who only owns a stock option and no shares is not a stockholder
  • typically also subject to vesting
  • early-exercisable stock option: special type of stock option. When an early-exercisable option is exercised early, the un-vested shares sold to the optionees are subject to a right of repurchase until they have vested. It's complicated, see this blog
  • 409A: penalties for issuing stock options with an exercise price below the FMV of the shares at the time the option is granted.
    • 409A safe harbor: have qualified independent appraiser determine FMV at specific date (valuation date) so IRS has to prove exercise price are grossly unreasonable instead of company has to prove exercise price was not grossly unreasonable
    • evaluation only valid for 1 year or some event that would materially change the value of the corporation
    • accounting firms perform financial audits may require 409A valuations redone if they don't trust prior evaluation

Post-money evaluation ensure earlier investor remain their percentage on the same round: (?)

Assume a company has never received any investment and has a fully-diluted capitalization of 10 million shares, excluding conversion of safes. If someone invests $1 million through a safe with a regular $20 million valuation cap, the safe will never convert into less than 500,000 shares. Immediately prior to the preferred stock financing, this would represent ~4.8% of the fully-diluted capitalization after the safe conversion (500,000 divided by 10,500,000).

Now suppose someone else invests another $1 million through an identical safe. That safe will also never convert into less than 500,000 shares. Immediately prior to the preferred stock financing, each safe would represent ~4.5% of the fully-diluted capitalization after the safe conversion (500,000 divided by 11,000,000). The first safe converts into a lower percentage as a result of the second safe (and vice versa).

If these safes had post-money valuation caps instead, each safe would be unaffected by the other. If the second safe were never issued, the first safe would convert into 526,316 shares (as calculated in the prior example). This would represent 5% of the fully-diluted capitalization after the safe conversion (526,316 divided by 10,526,316). If the second safe was issued, then each safe would instead convert into 555,556 shares, which would still represent 5% of the fully-diluted capitalization after the safe conversion (555,556 divided by 11,111,112).

Share, Stock, and Equity: they are the same

• Share: a unit of ownership in a company.

• Stock: summing up of shares

• Equity: total value of a company's shares of stock

Stock: Ownership of Delaware corporations is represented by shares of stock

• class of stock: stocks can be divided into classes. Each class may have different rights to voting, dividend, liquidation (when company closes and turn assets into money), specific requirements regarding the number of publicly traded shares

  • common stock: Startups typically issue common stock to founders, employees, and consultants, and issue preferred stock only to investors. Vested common stock is called restricted stock.
  • preferred stock: common stock with liquidation and dividend preferences

• series of stock: a way to separate early investor and later investor for different terms.

  • can customize ownership rights, valuation, and how dilution affect each class and each series
  • rare for common stock to be divided into series, but preferred stock is almost always divided into one or more series for each financing. A financing is usually referred to by the series of stock that was created for that financing

• issuing stock: the board has approved the issuance and there are enough authorized share available for issuance.

  • authorized share: The number of authorized shares (for each class or series) is set in the certificate of incorporation. Most startups authorize 10 million shares (usually in multiples of 1 million shares) of common stock at formation. If a corporation wants to issue shares, but there are not enough shares available for issuance, it must file an amendment to its certificate of incorporation with the Delaware Division of Corporations to increase the number of authorized shares. The maximum shares is used to signal future dilution plans
  • reserved share (stock option pool): authorized share that is still avaliable but reserved for some specific usage.
  • Franchaise Tax: Delaware charge a franchise tax based on the number of authorized shares.
  • retired share: Once shares have been retired (decided by the board), they cannot be re-issued.
  • percent ownership is owned share divided by total issued share, not the authorized share.

• stock plan: set up rules for stock upon formation of corporation (can change later, but more complicated), the name of stock plan include year

  • advantageous tax: having stock benefit from advantageous tax
  • regulation friendly: Corporations must comply with securities regulations under federal and state laws whenever they issue any securities, such as stock or stock options. By default, a corporation will have to analyze securities regulations and potentially make filings each time it issues securities. With a stock plan though, corporations only need to make the analysis and any necessary filings once per relevant state, with respect to issuing stock or stock options to employees or consultants.
  • easy for legal due diligence

The following are also terms commonly used to refer to stock plans:

Stock option plans Employee stock option plans (ESOPs) Equity incentive plans The term stock plan, as used in the context of startups, does not typically refer to:

Employee stock ownership plans (ESOPs) Employee stock purchase plans (ESPPs) These other types of plans have a very specific meaning, and are not commonly used by startups. Note that employee stock option plans and employee stock ownership plans share the same acronym, confusingly.

Contracts: Usually, the board authorizes CEO to enter into contracts, representing the corporation. Directors cannot unilaterally bind the corporation to a contract, although all the directors acting together can. In practice, this is almost never done.

Entire Process:

• File a certificate of incorporation, signed by the incorporator, with the Delaware Division of Corporations.

• Once the Delaware Division of Corporations accepts the certificate of incorporation, the incorporator adopts bylaws for the company, sets the size of the board of directors, and elects the initial board of directors.

• The board of directors appoints officers and authorizes the issuance of shares to the founders.

• The founders purchase their shares from the company and become stockholders. If their stock is subject to vesting, the founders usually make 83(b) elections.

• The founders enter into confidentiality and IP agreements with the corporation, known as CIIA (Confidential Information and Invention Assignment Agreement) or PIIA agreements.

• The board adopts and the stockholders approve a stock plan.

• The corporation qualifies to do business in its home state (assuming it's not located in Delaware).

• Indemnification agreements (optional): directors and officers agrees to compensate each other for any losses or damages incurred as a result of specific events or actions, may be done when series A.

Entities

Choice of Entities

• C Corporation*

  • double taxation: one coporate level capital-gain tax, one dividend tax
  • Section 1202 - qualified small business stock (QSBS): if you hold for 5 years, $10M with no tax
  • tax-free mergers
  • investor, IPO favorate, for fast-growing company, long term investment
  • converting from C Corp to LLC isn't tax-free
  • IRS 83(b) election: if you have vesting schedule, do it within 30 days to avoid some ordinary income tax
  • note that in early stage you only lose money so tax may not matter
  • required to have annual board and stockholder meetings (not enforced very much)

• S Corporation*

  • limitation: single class of stock, maximum 100 shareholders, only individual/non-profit shareholders, only citizens/residents of US may be shareholders
  • pass-through: only shareholders/members pay tax, but investors don't like pass-through
  • good for "life-style company" small business
  • required to have annual board and stockholder meetings (not enforced very much)

• LLC*

  • has some tax-free treatment
  • pass-through: only shareholders/members pay tax
  • pass-through loss: also, loss is allocated to the funder, not necessarily founder (to deduct tax liability)
  • converting from LLC to C Corp is easy and can be tax-free, but QSBS only starts tick down at the time of convertion
  • good for "life-style company" small business
  • You don't get W2, you get gross check
  • owner get scheduled K-1 from entity, and investors need to prepare for their return
  • Delaware LLC: if you gonna raise capital. If self-funded, stay where you located. LLC still pays franchise tax in Delaware.
  • LLCs are considered more customizable because the law doesn't give as much guidance on how they operate,
  • harder to do equity compensation due to lack of legal ecosystem

• Sole Proprietorship

• Partnership

• Limited Partnership

• B Corp*

  • financial, mission-based, and environmental sustainability bottom-line
  • may be taxed as C Corp, S Corp, or Partnership (almost no tax advantage)
  • mostly used as a marketing tool
  • each B Corporation must either be a C corporation or S corporation
  • B Corp status is different from Public Benefit Corporations.

• Non-Profit Corporations

  • profit doesn't go to share holder, no ownership or dividend
  • can qualify for tax-exempt status (income tax)
  • many limitations and oversee
  • purposes: religious, charitable, scientific, testing for public safety, educational, foster, prevention of cruelty to children, animals (note that "cheritable" is determined only by investigators)
  • two types: private foundation (individual, corporation, grant), public charities (school, hospital)

Delaware C Corp:

• law is predictable

• about $450 franchise tax for startup each year and payroll tax in both Delaware and where founders live

• Corporations generally need to have a registered agent in every state where they have employees (including founders), as well as the state where they incorporated

• You could yourself serve as registered agent, but don't miss any important mails

• Delaware only require one director

• privacy: Delaware corporations need to submit an annual report listing all directors and one officer every year. The annual report is considered public record, but isn't freely viewable online. People must pay a fee to request a copy of the report from Delaware. Don't need to list directors in COI.

• better protection against personal liability (although best is Nevada)

Wyoming C Corp: crypto and blockchain-friendly environment

Difference between Corps and LLC

• Corporations: shareholders owns, managed by directors/officers

• LLC: member owns, managed by managers/members

Limiting liabilities for entities:

• employee insurance

• contractual limitations

There are personal liabilities even with entities: - un-paid wages and wage taxes - not paying witholding tax - sign personal guarantees - using personal credit card

LLC

State Fee

You must pay annual and one-time state fee

State LLC	LLC Filing Fee	LLC Annual/Biennial Fee
Alabama LLC	$200	$50 minimum (every year)
Alaska LLC	$250	$100 (every 2 years)
Arizona LLC	$50	$0 (no fee and no information report)
Arkansas LLC	$45	$150 (every year)
California LLC	$70	$800 (every year) + $20 (every 2 years)
Colorado LLC	$50	$10 (every year)
Connecticut LLC	$120	$80 (every year)
Delaware LLC	$90	$300 (every year)
Florida LLC	$125	$138.75 (every year)
Georgia LLC	$100	$50 (every year)
Hawaii LLC	$50	$15 (every year)
Idaho LLC	$100	$0 (however, an information report must be filed every year)
Illinois LLC	$150	$75 (every year)
Indiana LLC	$95	$31 (every 2 years)
Iowa LLC	$50	$30 (every 2 years)
Kansas LLC	$160	$50 (every year)
Kentucky LLC	$40 (sorry, I said $90 in the video)	$15 (every year)
Louisiana LLC	$100	$35 (every year)
Maine LLC	$175	$85 (every year)
Maryland LLC	$100	$300 (every year)
Massachusetts LLC	$500	$500 (every year)
Michigan LLC	$50	$25 (every year)
Minnesota LLC	$155	$0 (however, an information report must be filed every year)
Mississippi LLC	$50	$0 (however, an information report must be filed every year)
Missouri LLC	$50	$0 (no fee and no information report)
Montana LLC	$35	$20 (every year)
Nebraska LLC	$100	$13 (every 2 years)
Nevada LLC	$425	$350 (every year)
New Hampshire LLC	$100	$100 (every year)
New Jersey LLC	$125	$75 (every year)
New Mexico LLC	$50	$0 (no fee and no information report)
New York LLC	$200	$9 (every 2 years)
North Carolina LLC	$125	$200 (every year)
North Dakota LLC	$135	$50 (every year)
Ohio LLC	$99	$0 (no fee and no information report)
Oklahoma LLC	$100	$25 (every year)
Oregon LLC	$100	$100 (every year)
Pennsylvania LLC	$125	$7 (every year)
Rhode Island LLC	$150	$50 (every year)
South Carolina LLC	$110	$0 (no fee and no information report, unless LLC is taxed as an S-Corp )
South Dakota LLC	$150	$50 (every year)
Tennessee LLC	$300	$300 (every year)
Texas LLC	$300	$0 for most LLCs (however a No Tax Due Report and Public Information Report must be filed every year)
Utah LLC	$54	$18 (every year)
Vermont LLC	$125	$35 (every year)
Virginia LLC	$100	$50 (every year)
Washington LLC	$200	$60 (every year)
Washington DC LLC	$99	$300 (every 2 years)
West Virginia LLC	$100	$25 (every year)
Wisconsin LLC	$130	$25 (every year)
Wyoming LLC	$100	$60 minimum (every year)

Source: Here

C Corp

Employment Contracts

Things to consider:

• role of founder

• compensation

• IP assignment

• restrictive covenants: confidentiality, non-compete, non-solicit (employees, customers)

• geographic limitations

• serverance

Employee vs Contractor Classification

Employee

• may have limited work place and method

• may not work for other company at the same time

• use company's equipments

• need insurance stuff

• should use an offer letter and CIIA agreement

• paid interns are a type of employee, although unpaid interns are allowed, but are under many restrictions which made it impractical

Note that IRS have criteria for determining whether someone is an employee or consultant:

The extent to which the services rendered are an integral part of the principal's business.
The permanency of the relationship.
The amount of the alleged contractor's investment in facilities and equipment.
The nature and degree of control by the principal.
The alleged contractor's opportunities for profit and loss.
The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
The degree of independent business organization and operation.

Facts that provide evidence of the degree of control and independence fall into three categories:

Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no "magic" or set number of factors that "makes" the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

Various states also have their own criteria as well.

minimum wage: minimum wage is a cash standard, so companies can’t use stock or options to satisfy this requirement

Founders must pay themselves. Federal law has an exception for employees that own 20% or more of a business, which can apply to many founders if certain conditions are met. However, not all states with minimum wage laws have a corresponding exception. For example, California's minimum wage laws do not have such an exception.

Payroll

Payroll Tax

Don't do payroll yourself.

LLC:

• self-employed

• no W2 but guaranteed payment 4 times a year

• not allowed to be in payroll

C Corp:

• payroll

Employee vs Contractor (consultant) Issue:

• since interns must be under supervision, most likely be employee

• you can't require contractors to work where and when

• Employee: before first payment, employer should request I-9 (rights to work in U.S.) and two forms of ID (e.g. driver license)

• Contractor: before first payment, employer should request W-9 to prepare 1099 NEC (non-employee compensation)

• Foreign Contractor: request W-8-BEN, otherwise entity must withhold the amount that it pays to foreign contractor, and tell it to government (foreign = not in U.S.)

Equity and Vesting

Equity assignment: well, be fair

Vesting consideration:

• vesting schedule and start day (commencement date)

  • standard vesting: 4-year vesting with a 1-year cliff. 1/48th of the total shares originally subject to vesting will vest every month.
  • 4-year straight line vesting: 1/48th of the total shares originally subject to vesting will vest every month.
  • vesting credit: If a founder put substantial work (usually fulltime) into the startup prior to the stock issuance, it is not uncommon for the startup to give the founder some vesting credit.
  • solo founder: recommended to still have vesting to avoid investor bringing up the topic
  • outstanding stock: stock that is not vesting or already vested

• buy-back arrangement when leave (forfeiture rarely used)

• effect of termination and/or sale of company

Vesting acceleration: number of trigger only refer to number of events, not exact terms. Vesting acceleration is uncommon and should only be used with caution.

• double-trigger: most commonly, vesting will accelerate if (1) the company is acquired and (2) that person is terminated in connection with or following the acquisition.

  • standard for founders
  • occasionally used for executive-level hires
  • undesirable by acquirers and consequently VCs

• single-trigger: company is acquired (less commonly: stockholder is terminated)

  • usually only given to advisors, if at all

Operation consideration:

• Directors Manager appoints Officers

• Majority or Super-majority of Board / Member / Shareholder

• Restriction on transfer of stock

Type of Equity: all of them are taxable (30 days tax-efficient)

• restricted equity (corp, llc only)

• options

• qualified options (corp only)

• non-qualified options (corp, llc only)

• profits interest (llc only)

• phantom equity (corp, llc only)

Typical allocation in stock plan: Using the standard 10,000,000 authorized shares

• 8,000,000 shares divided among the founders

• 1,000,000 shares to be reserved for issuance under a stock plan for employees and consultants

• 1,000,000 shares informally set aside for accelerators or additional co-founders

Here is how founder pay for their shares.

If future founder is expected, you might want to allocate less than 8,000,000 shares among current founders to avoid additional paper work (obtaining corporate approvals and making filings necessary to amend the certificate of incorporation to authorize more shares with the Delaware Secretary of State). Percent ownership is determined according to percent shares already assigned. A startup typically issues a meaningful portion of its authorized shares because leaving a large percentage of shares unissued can affect the Delaware franchise taxes.

Franchise Tax Calculation: Here

83(b) Elections: Here is instructions how to file it

• reason: avoid tax, and pay tax during each taxable event (when portion of equity vest)

• taxable income: difference between (1) the fair market value (FMV) of those shares at that time and (2) the price you paid for those shares. So increase in market value gives a lot of tax.

• 83(b) taxable income: difference between (1) the FMV of all the shares at the time you purchased the stock and (2) the price you paid for those shares as income for the current tax year. So typically no taxable income for founders.

• valid 83(b):

  • mail a signed (manual signature or e-signature) 83(b) election form to IRS within 30 days
  • provide a copy to the company (co-founder by email)
  • highly encouraged: get evidence by mailing 83(b) election form to the IRS via USPS certified mail with return receipt requested
  • highly encouraged: including a request for the IRS to acknowledge receipt of your 83(b) election by including a brief letter to the IRS, along with a copy of your 83(b) election and a self-addressed, stamped envelope. The IRS will then typically stamp the copy and send it back to you. (they might forget)

To file 83(b), you write a IRS Transmittal Letter and place two copies of signed 83(b) election form (one of them is for IRS to send back) and mail them with a self-addressed, postage-paid envelope to IRS where you normally pay tax by paper. I live in Pittsburgh so I need to mail them to:

Department of the Treasury
Internal Revenue Service
Kansas City, MO 64999-0002

You should find your address in IRS's where to file webpage under "Not enclosing a payment use this address..."

Employee hired at later time with vesting schedule also need 83(b) Elections.

Startups can either sell shares of restricted stock or give them to people for free. - sell: if sell shares below their FMV, the recipient must include the difference between the purchase price and the FMV as taxable income. - free: the recipient must count the FMV of the shares as taxable income.

Capital Contribution from Founders:

• don't increase FMV of stock at purchase as the value of stock will decrease given that stock sell at the same price

• simple loan: most typical. Company would be obligated to repay the founder at a later time, along with nominal interest.

• convertable node or safe: Like seeding itself. Founders should consider the impact a seed investment will have on control and relative economic outcomes, and any resulting side-effects on working relationships. Some future investors may seek to undo founder seed investments, if they feel the economics are too founder-friendly.

BOI report: Beneficial Ownership Information (BOI) report. Most startups formed in the US now need to submit ownership information to FinCEN, a government bureau that helps detect financial crimes. This requirement comes under regulations like the Corporate Transparency Act (CTA) in the United States. The aim is to combat financial crimes such as money laundering, terrorist financing, tax evasion, and other illicit activities by making it harder for individuals to use complex corporate structures to hide their identities and illicit funds.

• Date Incorporated: January 1, 2024 to December 31, 2024, file 90 days after incorporation (making March 31, 2024 the first possible due date)

• On or after January 1, 2025: 30 days after incorporation

Insurance

Employee wants:

• health insurance

• dental, vision, life/disability insurance

• voluntary benefits

Employer wants:

• worker's compensation insurance: in case worker die

• employment practice liability insurance: legal fee if someone sue you

• consistent policies and procedures: having employer handbook to ensure consistent policy will prevent employee sue you for unfair reason

insurance consideration:

• in case of sell or shutdown

  • tail coverage: insurance still effective for some period after shutdown

• maintain insurance

  • update changes with carrier
  • file claims immediately
  • pay bill
  • renew coverage annually

International Entrepreneur

Standard Stuff

F1: student visa

Practical training

• CPT: can work for "curricular practical training"

  • can't be your own trainer
  • must related to major

• OPT: "optional practical training" (12 month)

  • must related to major
  • can work for both employer and your own company at the same time (you can't work as a student)
  • STEM OPT Extension: give more time, company must be qualified for it

EB5:

• commit 1,800,000 (or half if in unemployment area) to new commercial enterprice

• at least 10 new jobs must be created

• investor must be engaged in management

• very heavy documentation, making it difficult

EB1-A: Employment-Based Immigration: First Preference EB-1 (Extraordinary Ability, Researcher, Multinational manager or executive)

O1: Individuals with Extraordinary Ability or Achievement

• employer file application on your behave

EB2:

• at least master degree

• employer file application on your behave (labor certification, can't file if yourself own company, unless your work is in national interest such as national defense and healthcare EB2-NIW)

H-1B:

• employer file application on your behave (you can own company, but must be supervised, must have differentiation between company and employee)

• H-1B has quota, lottery (85/200)k

• employer must pay above certain wage rate

International Entrepreneur Parole

It's not a immigration status

1st 30-month grants of IEP:

• own 10% of entity created in the past 5 years

• active, central role in entity

• meet one of

  • attract 250k by VC, angel, accelerator, can't be from things related to family
  • federal, state, local grants of 100k
  • or other way to prove you have potential for rapid growth and job creation combining above

• spouse and children also receive, spouse get EAD (employment authorization) card

• revoke: can't sell, bankrupt, or malfunction entity

• can apply from outside of U.S.

• can apply to other VISA as well during the period

2nd 30-month grants of IEP:

• own at least 5%

• meet one of

  • attract 500k investment or grants
  • 500k annual revenue, with 20% growth
  • create 5 fulltime workers
  • or other way to prove you have potential for rapid growth and job creation combining above

Cannot pay extra 2.5k to get approval or deny within 15 days

Fundraising

Some startup attorneys have concerns that if founders purchase their shares right before a financing, the fair market value of those shares may be higher due to the imminent financing. These startup attorneys advise startups to incorporate as soon as possible in order to avoid any possible questions about the fair market value. However, other startup attorneys argue that the fair market of the shares sold to founders at formation is still likely at or near par value, even if a financing occurs shortly afterwards. These startup attorneys point out that investors don't want to invest in an empty corporation, they want to invest in a corporation run by the founders and that owns the intellectual property created by the founders. The corporation is arguably not run by the founders until they purchase shares and appoint themselves as officers. In addition, any intellectual property developed by the founders won't belong to the corporation until the founders transfer it, which typically happens when they purchase their shares.

Deck

Here are some resource on preparing deck:

• Figma template: Here

• Deck tutorial: Here

• More deck examples: Here

Terminologies

Fully-Diluted Capitalization: total number of "used shares"

• Pre-money valuation: valuation of the startup prior to the fundraising

• Capitalization (structure of a corporation): structure of equity and debt of a corporation

• fully-diluted: assuming that all plans and obligations (whether outstanding or potential) to issue shares have been fulfilled.

  • all preferred stock has been converted to common stock;
  • outstanding options, warrants, and other securities with a right to acquire shares have been exercised; and
  • any shares reserved for issuance under a stock plan have been issued.

• has nothing to do with authorized share

There is no single definition of fully-diluted capitalization. For example, un-issued shares reserved for issuance under a stock plan can be excluded from a fully-diluted capitalization. This is commonly done when the fully-diluted capitalization is being calculated in connection with the acquisition of a startup, since startups typically do not issue equity following an acquisition.

Angel Investing

Investor Look At:

• management, team: 30%

• market: 25%

• product: 20%

• tech, uniqueness, solution: 15%

• investment structure: 10%

Angel Investor sheet:

• preferred stock

• liquidation preference

• board & information rights

• anti-dilution

• participation rights

Angel Investor networks: angels go together to invest

• diversify portfolio

• college money

• find the right person

Angels are turning into micro VC funds these days

Due diligence: assessing company (6 weeks ~ 3 months)

• Team Evaluation: Assessing the experience, skills, and track record of the startup's management team. This includes evaluating their ability to execute the business plan and adapt to challenges.

• Market Analysis: Understanding the market size, growth potential, competitive landscape, and the startup's unique value proposition. This involves analyzing the target market, customer needs, and how the product or service fits into the current market.

• Product or Service Evaluation: Examining the startup's product or service for feasibility, scalability, and market fit. This may involve technical evaluation, user feedback, and understanding the development stage of the product.

• Financial Assessment: Reviewing the startup's financial statements, revenue models, burn rate, and future financial projections. This includes understanding the company's capital structure, valuation, and use of funds.

• Legal and Regulatory Compliance: Ensuring that the startup complies with relevant laws and regulations. This includes reviewing legal documents, intellectual property rights, and any potential legal risks.

• Risk Analysis: Identifying and evaluating potential risks associated with the investment, including market risks, technology risks, and execution risks.

• Exit Strategy: Understanding the potential pathways for a return on investment, such as an acquisition, merger, or initial public offering (IPO).

• Syndication: In some cases, angel groups may collaborate with other investors or angel groups to share due diligence efforts and invest collectively.

Expectation: 50% failure after investing, 25% gives 10x~30x return

Safe: no protection for investor

Convertable Note: debt instrument

Talking to Early Stage Investors

Market Size:

• how much more costomer?

• how much money spend?

• market growing?

• competator? expected market share?

• path to 1B valuation?

• are you regulated industry?

PMF

• must have or nice to have?

• how high can you sell it to make profit?

• uniqueness

• can you scale?

Things to expect

• raising capital: fulltime job

• setting up operation: attorney, payroll, hr, benifit, office

• hire team: plan, sourcing, vetting, closing

• MVP

• sales cycle

Traction and validation is key!

• customer validation:

  • early stage: let your customer give you advice
  • if B2B, bake performance metrics into contract for automatic activation (and you track metrics)

• test for commercialization

Investor are not looking for the right solution anymore. Since knowledge is relatively cheap due to Internet, traction is the key now.

Type of investors:

• "smart" money vs "dumb" money

• lead (>50% of round) vs follow investor (<10% of round)

Accounting

Resources: labor, material, energy, property, equipments, capital

Requirements to obtain capital: the reason why we need accounting

• Business Plan

• Financial Report: financial statement for the prior 2 years

• Projected (proforma): financial statement for 3 years into the future

Accounting, Finance, Economics: things required for pitching

• accounting: looking backward, revenues, expenses, capital

• finance: looking forward, assessing value, rates of return, allocation

• economics: market, regulation, supply demand, consumer preference, price sensitivity

Three financial statements:

• balance sheet:

  • total assets: current assets and non-current assets (current = will be used up within 12 months)
  • total liabilities: current liabilities and non-current liabilities (current = will be paid up within 12 months)
  • goodwill: additional value perceived by the market during acquisition. intangible asset also include brand.
  • total equity: share capital, retained earnings

• income statement: people will use it and compare to other company

  • cost of goods: employee wage, everything to produce the product
  • operation expenses: sales, marketing, accounting expenses
  • gross profit: a number
  • gross margin: percentage

• cashflow statement: ties balance sheet and income statement together

  • operating: get money from sale of goods and services
  • investing: get money from buying and selling asset
  • financing: get money using debts or equities

Above notes taken from Here

Leger (GL): quickbooks (industry standard) provide service to keep leger to track everything

• banks can directly plug everything into quickbook, most likely the only option

• desktop: $400/year (or $80/month), take care of creating all three financial statements. Desktop version as of today has better quality. Can share license between companies.

The Chart of Accounts (COA): how transactions are organized into multiple revenue streams. The organization may be different depends on who you share this to (investor, acquiring)

There are fees (Formation, Certified Copy, Foreign Qualifications, Certificate of Good Standing, Amendment, Dissolution) for incorporation and is different for each state. See Here. Generally, book-keeping and tax-filling could be more expensive than state-fee.

Hiring

People care about:

• compensation

• work-life balance

• location

• learning opportunity

Example Job Description

# neko, inc.

neko, inc. is a AI-driven company, supported by incubators in San Francisco, making next generation 3D creation software for artists. Our remote team have talents from CMU, NYU, NUS who have worked in Microsoft, ScaleAI, and Midjourney. We are creating a new fun and easy way to automatically generate 3D assets for various purposes like videos, games, and performances. Our website: https://neko.tech

Our team is fully remote and promote flexible working hours (work anytime anywhere). We strongly believe in open-source and therefore maintaining open-source project is a significant chunk of our work.

We hire multiple positions: fulltime, parttime, or internship (1500~3500 USD/month)

- ML Engineer: ML Engineer's job is to discover, tweaking, and implement algorithms from research paper
  - must have working experience in Diffusion or NeRF
  - must be fluent in pytorch (keras, tensorflow don't count)
  - be able to read, understand, implement paper in Diffusion and NeRF and keep up with latest trends.
  - knowledge in computer graphics is a big plus
  - experience in writing CUDA kernel or python C++ extension is a plus

- Fullstack Engineer: Fullstack Engineer's job is to implement web interface of our product
  - must have React (typescript) or similar experience
  - experience in backend technology like k8s is a plus

- Other Position: if none of above fully describe what you can contribute, feel free to make up your own position.

We offer:

- an opportunity to invent things that have never existed before, putting your name as the author of a great product that changes history

- you are given the FREEDOM to make critical design decisions in a startup environment

- working along side with world-class engineer and researcher

- fully REMOTE and FLEXIBLE working hour

- a CARING environment without any discrimination is race, genender, ethnicity, sexual orientation, disability, ...

Qualification:

- We don't discriminate based on your education or major: highschool, bachelor, master, PhD from anywhere are all welcome, as long as you got the talent.

- You must have project experience

- Our main product is a open-source project. So having open-source contribution is a plus.

- We value your creativity, passion, and the ability to have fun.

Interview Process:

- There is no coding interview like codeforce.

- You might have a mock project interview to test basic programming ability.

- You must be able to talk about your past projects in depth.

Finding People

Sourcing:

• Cold outreach: effective, reliable, repeatable. (1) keep it short. (2) no pitching, no description, but must have a website. (3) make people feel they're important by proving time to learn about the person. (4) easy call to action. offer 10min call and specific time. (5) not a recruiter. (6) midweek evening is the best, or sunday evening are both good time for sending email and meeting.

• Target: profile should be strong fit internally. Or target hiring people from specific company.

• Reply: give a calendarly link for people to pick time from. If people reply no, still insist call ("smart people connect"). If no reply, 4~5 followup.

• Everybody in company participate in cold outreach (100 messages per week). This is to give multiple touchpoints for network effect.

• Hire house-recruiter. Should be 10% of work force. Hire as soon as 12~15 people.

• Outside recruiter. (1) take out for dinner. (2) coach on pitch, vision, myself as founder, make them repeat back. (3) try different recruiter. (4) tell them why like or dislike candidate.

• Referral: Don't hire friends and family. But teammates' friends are very good. Don't be transactional referral: dinner time or stock.

• Gamification: create a fun leaderboard of recruiting. Recruit-thon. (with food or food credit on network)

• Game Nights: game nights with other friends are easier to introduce new people to the company.

• Social Media: (1) stealth is good, but... (2) millions of views on Twitter and Linkedin. But only do so if you are already "successful" (3) you need to generate interesting thoughts on social media to get people hooked. Give teammates (customized) content to post!

• Job Posts: keep passive resume flow.

Events:

1. create event, invite people 1~2 weeks before event
2. ping 1 week, 3 days, 1 day before event
3. buy more material than you need, prepare for lots of people to come
4. free uber home for employee
5. focus on guests, introduce them to team members, have fun
6. take photo, post on facebook
7. thank everyone for showing up, post pictures (even if didn't show up) to keep dialogue to invite them again.

Selling to People

Convincing and Evaluating:

• Difficulty: People in startup are self-selecting: don't hide difficulty and uncertainty, we don't want easy. They look for impact.

• Positive Energy: People join because of founder: energize them! So share your own hardship and be relatable. (let mission, vision be the reason why they join)

• Authenticity: Build your own authenticity. Don't confirm to social standard. Authenticity provides Safety and Trust.

• Polarizing: to be authentic is to have polarizing opinions that are real. This will filter out some applicants you don't want. And polarizing makes you unique, therefore standout.

• Culture: Conscious Culture movement. Document culture actively and share.

• Product: Get candidate excited about the product. If not get excited, you may not want them. Have a domain name and exceptional product demo.

• Credibility: share if you have credible investors backing you.

Evaluating People

Breath Interview: past 2 jobs mission manager, team size, revenue based, team vibe, how company grow, personal impact, role change over time? Depth Interview: design a presentation on a topic in depth Culture Interview: with actual rubric

Asscessing Talent: be value driven. Be picky: Hiring A player attract B players. Hiring B players attract C players.

• Passion: talks about past projects or topics interest them, hunger to learn, deeply curious

• "Ownership": take things outside of job description, identify both problem and solution, fix things themselves (not with help)

• "Scrappiness": move fast, make decision with limited resources, come up with creative solution

• Collaboration: can they ask followup question, can they form opinion, do they help others for no return

• Listen: are they good listener, appreciate different perspective

• Awareness: aware their own weakness, put themselves in others shoes

• Coachability: ask for feedback, listen to feedback, make changes based on past mistakes, give others feedback in respectable ways

• Skill: Nobody will, and should satisfy all skill, otherwise the job would be broing and not challenging. You can't find people who are motivated to learn.

Pseudo Interview Questions:

• What motivates you.

• Tell me about a time when you didn't know how to do something, challenges and outcome?

• Tell me a time when you don't have adequate resources, but you figure out the solution anyway.

• How do you incorporate giving and receiving feedback in daily life (example?)

• When do you have conflict or disagreement with someone professionally? How do you resolve?

• Which of company's core culture do you identify with, and least identify with?

• Past project you're proud of? If it is a collaborative project, what part did you do. Other people's part? Most challenging part of the project? Tough decision? Why make decision? Trade off? Unexpected things happen? Mistakes? What did you learn?

Our company culture: fun, creativity, caring, personal growth, freedom and responsibility, gamification of system-hacking.

Culture-add:

• nobody will check every culture, not realistic

• nobody should check every culture, as it creates mono-culture and blank-spot

• every hire must have a "strong yes" by someone in the company (not a perfect one, but a special one, be charismatic)

• "Fits in" / "Social": they should not be "the reason to hire"

• Diversity: gender, racial, locational diversity

Actual Meetings

1st Meeting: 25% interview, 75% selling

• face to face conversation

• 30%~40% makes to next round

• Figure out motivation:

  • why change job
  • what motivates them
  • what are you looking to gain
  • things missing in their experience

• Check

  • culture requirement
  • skill set
  • fall into good compensation, job level, location

• Make them important: will give info to hiring manager

2nd Meeting: 50% interview, 50% selling

• tell them to prepare questions

• feel confidence about hiring

3rd OnSite:

• no more than 3 interviews

• meet and greet: junior employee meet senior role

• company swags

Debref:

• within 24 hours

• write feedback before meeting

• 2min for each person feedback

• 90s for making decision

During Process: momentum is the key

• send new articles interested

• creating more touch points

• texting is good

Closing a Deal

Reference Checks: [Chapter 5 midway, omitted]

Equity Communication: [Chapter 6 beginning, omitted]

Closing:

• make sure have dinner

• make sure send gift, get their family and friends support it

• make them tweet it and change linkedin is your goal

• make social posts (if candidate okay with it), make candidate proud

• before giving offer, ask "can they perceive working at the company" and "how my company compete with other options"

• best present offer when candidate most excited about the company

• "big email" technique using what matters to them. [Chapter 6 beginning]

Don't under-level or under-pay. They will figure out quickly.

Offer Letter Design

Offer letter will become the thing people share to family. [Chapter 6 21:16]

Don't assume candidate get everything from interview. Remind them about confidence. Offer letter is a recap of entire sales process: vision, product, culture, credential. The deal isn't sealed until linkedin update and come to work for 1 week.

Send congratulation email to references. Have investors send congratulatory note.