- The video features Carolyn Levy discussing startup mechanics and legal issues.
- The recommended platforms for incorporating a startup are Clerky and Stripe Atlas.
- It is important to form a separate legal entity for the startup by filing a certificate of incorporation.
- Delaware is recommended as the state of incorporation due to its ease and efficiency.
- Common mistakes made by founders are discussed, including not buying their stock and not allocating stock equitably among co-founders.
- The process of forming a board of directors and appointing corporate officers is explained.
- It is advised to open a corporate bank account early on and treat the corporation as a separate entity.
- Post-incorporation, founders need to purchase their shares using a stock purchase agreement and should be subject to vesting.
- Keeping a cap table to track stock ownership is crucial for every company.
- Founders should pay themselves minimum wage and employment agreements are not necessary for startups.
- It is important for founders and employees to sign confidentiality and intellectual property agreements.

- It is important for all founders and future employees to sign a CIIA or PIIA agreement to protect confidential information and ensure company ownership of intellectual property.
- Early stage startups may not be able to afford employees, so founders may have to do all the work until they can hire.
- It is important to open a corporate bank account and use it for company expenses, keeping careful documentation.
- Startups need to pay taxes and file tax returns, even if they do not owe taxes.
- Storing legal documents in a shared Dropbox folder is recommended, and ensuring all documents are signed and dated correctly.
- Treating the startup like a real company is important for protection from personal liability.
- Incorporating sooner rather than later is recommended for liability protection, intellectual property ownership, fundraising, and contract purposes.
- LLCs are not typically preferred by investors, so it is best to start as a corporation if planning to fundraise.
- Using online platforms for incorporation can save money compared to hiring a lawyer.
- If working on a startup while still employed, it is important to keep everything separate and be aware of non-compete agreements and legal considerations.
- Vesting of founder shares is important to prevent future problems and maintain fairness among founders and potential investors.
- Single founders should still consider vesting, as it sets a good example and may be necessary when hiring employees.

- Founders often make the mistake of not reading legal documents, especially fundraising documents, which can lead to problems in the future.
- Paying employees with only stock is generally a mistake, unless they are properly classified as independent contractors.
- The importance of taking precautions to avoid acrimonious breakups with co-founders, such as paying yourselves, having vesting on founder shares, and having a clear CIIA.
- It is important to take action on issuing stock to employees sooner rather than later, as the longer you wait, the more expensive the stock becomes.
- It is advisable to let go of a name if there is a trademark dispute, as the expense and distraction of fighting it can be substantial.
- Trademark registration is considered a nice-to-have, but not a need-to-have in the early days of a startup.
- It is not recommended to spend a lot of money on a domain or get into a lawsuit over a name.
- The 30-day IRS clock for filing an 83B election starts from the day the stock is bought, and missing the deadline can have significant tax implications.
- Immigration issues, such as obtaining a TN visa, require expert advice and should be handled by professionals.
- It is generally advisable to form a C corp rather than an S corp, as S corps require making a tax election and have pass-through taxation.

- S corps have pass-through taxation, while C corps pay taxes at the corporate level
- C corps are preferred by investors and taking outside investment may invalidate S corp status
- 10-20% equity is typically reserved for employees, but it depends on the company
- Clerky and Stripe Alice offer options for creating a stock option pool at formation
- Unpaid interns are generally considered employees and it is generally illegal to have unpaid interns
- Nonprofits have different legal requirements and disclosure obligations compared to for-profit startups
- It is generally not advisable to work with strangers as partners or co-founders
- Register the parent company in the country where the market and business are located
- Use legal services tech until significant capital is raised, then consider hiring a lawyer for custom agreements
- Starting a startup while having a full-time job is difficult and not advisable
- Patents can be useful for protecting technology, but their importance varies depending on the industry and type of startup
- Advisory board members may or may not receive equity, it depends on the company

- Advisory boards are more common outside of the US and Silicon Valley, with academics and professors often serving as advisors in life sciences companies.
- It is generally better to invest in advisors rather than giving them equity for free.
- When a co-founder who is a personal friend needs to be fired, it is best to resolve the issue quickly rather than letting it fester and potentially harm both the company and the friendship.
- Spending money on a lawyer for privacy policies and terms of service is worth it for tricky situations, but there are also good services available online.
- Shareholder agreements are more common outside of the US and can be overly detailed for startups, but are important for governing relationships with investors.
- It is possible to conceal some information in company charters, but it is not a major concern and should not be a priority.
- B Corps, which are a mix of nonprofit and for-profit corporations with a social good mission, are gaining in popularity but may not be as attractive to venture investors.
- It is best to become a B Corp before raising money, as converting later may be more difficult.

- The person is asking whether they should register a company in the US in addition to their SaaS company registered in Australia, as they are targeting the US market.
- The speaker advises determining where the customers are and suggests incorporating in the US if that is the target market.
- They mention that fundraising is easier and more favorable in the US.
- When adding new co-founders later on, the original founders do not need to restart their vesting schedule, but investors may request a restart.
- Hiring outside the US depends on the country's rules and may require creating a local subsidiary or branch.
- The speaker recommends seeking advice from someone with expertise in the specific country's laws.
- The speaker mentions upcoming events and encourages participants to engage on the site's forum.

- Carolyn Levy discusses startup mechanics and legal issues in a video.
- Recommended platforms for incorporating a startup are Clerky and Stripe Atlas.
- It is important to form a separate legal entity for the startup by filing a certificate of incorporation, preferably in Delaware.
- Common mistakes made by founders include not buying their stock and not allocating stock equitably among co-founders.
- The process of forming a board of directors and appointing corporate officers is explained.
- Opening a corporate bank account early on and treating the corporation as a separate entity is advised.
- Founders need to purchase their shares using a stock purchase agreement and should be subject to vesting.
- Keeping a cap table to track stock ownership is crucial.
- Founders should pay themselves minimum wage and employment agreements are not necessary.
- Confidentiality and intellectual property agreements should be signed by founders and employees.
- Incorporating sooner rather than later is recommended for liability protection, intellectual property ownership, fundraising, and contract purposes.
- LLCs are not preferred by investors, so starting as a corporation is best for fundraising.
- Using online platforms for incorporation can save money compared to hiring a lawyer.
- Non-compete agreements and legal considerations should be kept in mind when working on a startup while still employed.
- Vesting of founder shares is important for fairness and future problems prevention.
- Reading legal documents, especially fundraising documents, is crucial to avoid future problems.
- Paying employees with only stock is generally a mistake, unless they are properly classified as independent contractors.
- Taking precautions to avoid acrimonious breakups with co-founders is important.
- Letting go of a name in case of a trademark dispute is advisable to avoid expensive legal battles.
- Trademark registration is not necessary in the early days of a startup.
- Missing the deadline for filing an 83B election can have significant tax implications.
- Immigration issues require expert advice and should be handled by professionals.
- Forming a C corp is generally advisable over an S corp for tax purposes and investor preference.
- Equity is typically reserved for employees, and stock option pools can be created at formation.
- Unpaid interns are generally illegal, and nonprofits have different legal requirements compared to for-profit startups.
- Working with strangers as partners or co-founders is generally not advisable.
- Registering the parent company in the country where the market and business are located is recommended.
- Using legal services tech until significant capital is raised is advised, then consider hiring a lawyer.
- Starting a startup while having a full-time job is difficult and not advisable.
- Patents can be useful for protecting technology, but their importance varies.
- Advisory boards and their equity allocation depend on the company and industry.
- Resolving issues with co-founders who are personal friends quickly is better for the company and friendship.
- Spending money on a lawyer for privacy policies and terms of service is worth it for tricky situations.
- Shareholder agreements are important for governing relationships with investors.
- Concealing information in company charters is not a major concern.
- B Corps are gaining popularity but may not be attractive to venture investors.
- Incorporating in the US is recommended for targeting the US market and easier fundraising.
- Adding new co-founders later on does not require restarting the vesting schedule, but investors may request it.
- Hiring outside the US depends on the country's rules and may require creating a local subsidiary.
- Seeking advice from someone with expertise in the specific country's laws is recommended.

YC Partners Carolynn Levy, Jon Levy,  and YC General Counsel Jason Kwon discuss legal mechanics for startups, in addition to common mistakes and problems.

You can find the lecture transcript and slides here: https://www.startupschool.org/videos/35

Learn more at https://www.startupschool.org/

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 3 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 we gave, 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.

Jeff totally exaggerated, but we have seen a lot of stuff.

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 going to 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 going to come up here.

And I want to thank all of you who sent in email questions to us beforehand because we're going to 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.

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.

Clerky and Stripe Atlas have already been mentioned and those are the 2 that we think are great.

We have extensive experience with Clerky and I was really happy to hear that Darby Wong, 1 of the founders of Clerky, is gonna do an AMA because he's great.

1 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 1 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, but 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 1.

If you are 2 founders, you can have a board of 2.

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.

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.

So now we're gonna 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 2 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.

You 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.

Founder 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 voting, during the vesting period rather, 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 4 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 1 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.

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 1 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 1 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.

So ideally you will have opened a corporate bank account as part of or right after incorporating the company.

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.

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's just getting started, you're not gonna 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.

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 founder stock restricted agreements, founder 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 1 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.

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 gonna 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 gonna actually be different for every startup, but in general, we believe in doing it sooner rather than later.

And so my top 4 reasons about why you wanna do this would be number 1, because forming a corporation protects you and your co-founders from personal liability for your company's actions.

Number 2, 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 3, 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.

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, Kirsten 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.

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 wanna 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 1 of the good online platforms that we just talked about from corporation.

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.

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.

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 1 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.

Okay, so I'm a single founder and I don't need vesting, you may be thinking.

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.

I signed a legal document but I was too busy to read it so I have no idea what it is.

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.

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 5 page safe.

So you wanna get into the habit now of reading all of your company documents.

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.

And it's OK 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.

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.

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 founders' 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 wanna 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 grant, you want to give your employees cheap stock, or as cheap as you can, because expensive stock is not very incentivizing.

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.

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.

I picked an awesome name for my company, but I have to pay 10K to get the domain.

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.

Like, don't just research the PTO, research it.

And then do whatever is cheapest and most efficient and move on.

So now we're going to 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 going to go through a bunch of those now.

Okay, Jason, I'm going to ask you the first question when you're ready.

See all Y Combinator transcripts on Youtube

Carolynn Levy And Panel (Jon Levy, Jason Kwon) - Startup Legal Mechanics