# Startup legal mechanics 

**Author:** Carolynn Levy
**Type:** Video
**URL:** https://www.ycombinator.com/library/7R-startup-legal-mechanics
**YouTube ID:** BTShgZxiNV8

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

## Transcript

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 quan they'll answer some questions about getting your startup started legal issues i will point out that these three folks are probably the finest legal minds in the startup world these and i 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 Eve everyone homework to watch videos from from 2014 in 2017 on startup mechanics I urge you all to watch those videos if you haven't already as as an adjunct to

what Carolyn and and John and Jason are about to say because you will find them useful as you build your company so Carolyn thank you Jeff totally exaggerated but we have seen a lot of stuff okay so like Jeff just mentioned back in 2014 Kirstie and I did a start-up 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 not lecture but I am gonna skip the part about investors and fundraising because Kirstie is actually gonna do an entirely separate lecture on that stuff later on in the program next I'm going to go through some common mistakes and problems that we see founders make and finally Jason and John are gonna come up here and I want to thank all of you who

sent in email questions to us beforehand because we're gonna go through some of those on the some of legal mechanics questions that you guys already submitted okay so um the first thing you have to do when you're starting a start-up is actually form your separate legal entity this is your company and the act of incorporating is just filing a document called a certificate of incorporation which is really short and simple for startups and you go and you file it with

the Department of corporations in whatever state you choose to incorporate in now we strongly recommend choosing Delaware because the process in that state is really really easy and the service is really fast and efficient and that's the primary reason we suggest but also as a lot of you probably know you know most public companies are Delaware companies so that saves you a little time if your gonna go public and some investors actually will require that you're in Delaware before they before they'll fund you so that's another good

reason to ban Delaware okay so this has been mentioned a couple times already we also strongly recommend that you use an online platform specifically geared to startups to incorporate and there's a lot of these platforms some are good some are not so good Clerke and stripe outlets have already been mentioned and those are the two that we think are great they're YC companies we have extensive experience with Clerke and I was really happy to hear that Darby Wong one of the founders of Clerke is gonna do an AMA because he's great one of the

reasons why we think clerking stripe outlets are so great is because they don't stop after formation they also have post incorporation documents and some of the not so good platforms stop after formation and they don't do post incorporation and one of the things that doesn't happen if you don't do post incorporation is founders don't buy their stock and when we were commuting down here today Jason reminded me of a story a really big company and a really

big law firm and they didn't the founders never bought their stock and this wasn't discovered until the Series B financing so if you think this sounds weird like of course the founders need to buy stock look this is a mistake that ax happens okay another step in the incorporation process is forming a Board of Directors and for early startups the members of the board are usually the founders if you're a solo founder you can have a board of one if you are two founders you can have a board of two um there's a misconception that board of

directors have to have an odd number of Directors but that is not necessary and then you need to appoint corporate officers you need to have a president and/or a CEO you can't have both if you want and in Delaware you're required to have a corporate secretary and another part of the process is adopting corporate bylaws for start-ups 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 I it's critical to form good habits around the way you treat your company's money okay so post incorporation so now we're gonna go back to what I just said about issuing founders stock you all know that corporations are owned by stockholders

and you and your co-founders are going to be the first stockholders okay if you are a founder team of two or more you have to think about how you're going to allocate that stock our belief about the best way to allocate stock among founders is to think about the challenge of execution and that's another way of saying the following do not place too much importance on the founder that had the idea for the business because all of the hard work is in front of the team and all of the value is going to be created in the future if you are all

going to be working hard going forward but 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 founders stock purchase agreements work is that you give a very very small amount of cash and then you contribute to the company any intellectual property that you've created so that's the total purchase price for your founder shares founders shares should be subject to vesting and this bet 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 whether you can vote all of your shares but if you quit your company before the full period of time has passed the company will automatic automatically repurchase all of your unvested shares when shares are subject to vesting they're called restricted stock so your founder stock purchase agreement will be actually a restricted stock purchase agreement and as I'm sure most of you know the standard or typical vesting period is about four years so I'm not

gonna get into cap tables in this lecture because Kirsty 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 you know effortlessly and we'll make sure that those resources

are included on you know on one of these on 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 we're look at that so it's pretty self-evident that most founders can't pay themselves in the early days of their startup because practically if there's no money you can't have payroll but if there is enough money it's a really good idea for founder's to pay themselves minimum wage strictly

speaking it's against the law not to pay yourselves although obviously this isn't a thing that that gets enforced okay um so employment whether a 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 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 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 you know everyone who works for your company has signed a C

III a or a PII a and I'm sure a lot of you heard of these it's a confidential or proprietary information invention assignment agreement agreement the CI ia protects the company's confidential information and trade secrets and ensures that all the intellectual property that is because created is owned by the company so you want everyone in the company signed up to one of these very early-stage startups usually cannot afford to have employees but the solution is not to convince

people to work for your company for free it's one thing for founders to work for free but it's significantly riskier for non founders creating work product and other intellectual property to work for no compensation so unfortunately all of you all have to do all the work until you can afford to hire up so I'm gonna wrap up this summary and digress from legal mechanics for to make a few common sense points and my belief my personal belief is that ignoring these points can cause you to waste a lot of time fixing problems

later these are really common mistakes so ideally you will have opened a corporate bank account as part of or right after incorporating the company hopefully you have a little bit of money in it so you should use that for all of your company expenses if the company bank account has no money in it and you are paying for all the business expenses with your own personal savings the company can reimburse you later when it eventually has money but you absolutely need to keep all the receipts and you

need to document everything carefully corporations have to pay taxes if your startup is a Delaware corporation there is an annual tax you have to pay to that state but if you calculate it correctly the tax owed is really minor for startups corporations also have to pay Corp they also have to file a corporate tax return with the IRS obviously when your company's just getting started you're not going to actually owe they are as any taxes but you still have to file the return and if your startup does have employees even if

it's just the founders getting minimum wage you need to pay payroll taxes and the best way to do this is to get set up with an online payroll service of which there are many oh this is a personal favorite of mine so you need to find a good place to store the company's legal documents like the certificate of incorporation the bylaws the CI IAS the founder stock restrictions agreements founders stock purchase agreements for example a shared Dropbox folder is a good idea do not store them in a

co-founders email because you do not want one person to control the access to these very important documents also make sure that the legal documents that you are carefully collecting and storing are actually the signed and dated versions and triple check to make sure that there are every blank is signed by every party that needs to sign it later when your company is fundraising and investors are doing due diligence on your company it just looks really amateur when you serve up a bunch of formation documents and there's a bunch of blanks in them all

right so that's the summary of that oh sorry one more thing I just wanted to mention what is acting like a real company and my opinion is that acting if you treat your startup like a board of directors governed taxpaying 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

supporting a separate legal entity anyway okay now we're going to move on to common mistakes and problems okay I don't know when to form a corporation so this isn't actually a problem or a mistake I just wanted to talk about it here and it turns out that a lot of you emailed us this question so the right timing on when to pull the trigger on incorporating is going to actually be different for every startup but in general we believe in doing it sooner rather than later and so my top four

reasons about why you want to do this would be number one because forming a corporation protects you and your co-founders from personal liability for your company's actions number two the Corp you know the corporation is the correct repository for all of the intellectual property that you and your co-founders are creating otherwise you're all just working on a project the separate pieces of which are owned by individuals and to me that's a hackathon not a corporation number three you can't raise you all know this you can't raise

real money for your startup without forming 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 or with you know vendors or consultants or potential customers but personally and if you try to do these things that is individual it's super messy I formed an LLC instead

of a corporation because I got advice that LLC's are better for taxes so for our purposes this is usually a mistake because even though LLC's are better for optimizing taxes the vast majority of angels and VC firms will not invest in an LLC so if you plan to fundraise from people other than a small group of your friends and family your startup needs to be a corporation the question that several of you asked in the emails is whether there are other reasons besides fundraising

considerations to form a corporation instead of an LLC and so in other words if you're not planning to fundraise for a long time after starting your company does it make sense to start out as an LLC and then switch to a corporation later and in my opinion 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 kirstine I told an anecdote about a company that

was an LLC and they had to convert into a Delaware corporal nightmare it's obviously an outlier but we do see this a lot at YC we see a lot of LLC to corporate conversions and it's um it's just kind of a headache you don't need okay I'm thinking about hiring a lawyer to incorporate my company so this is usually not a mistake if your startup is really complicated for some reason or if you've already

formed a non-us entity and you now want to come to United States and raise money in these cases you probably do need to get a lawyer but I'm sure all of you know lawyers are very expensive so save money and use one of the good online platforms that we just talked about firm 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 Clerke and stripe outlets will do a much better job I'm starting to startup but I still have a full-time job this is actually already come up today a 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 resource 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 non-compete agreements with your employer that may come into play so if you're gonna do this you really should

do a little bit of research first or get legal help our founding team has been working on this idea for years so we don't need vesting on our founder shares this is a broken record we hear this all the time this is a big mistake if you don't have vesting you are setting your company up for future problems no investor wants to put money into a company with founders who may decide the next day that their burned out so they take their shares and they leave but the more common scenario is that one member of a family founding team decides that

he or she is burned out and so leaves the company with a giant ownership stake the remaining founders have to do all the work but someone who's not doing any work has the same ownership it is painful to fix this problem because the price of the company's stock may have increased in the interim and it becomes really expensive for the remaining founders to allocate the share ownership fairly how many of you how many of you are single founders I'm just curious quite a few okay okay so I'm a single

founder and I don't need vesting you may be thinking I think this is also a mistake single founders obviously don't have the same problems that founder teams do but no vesting is still unattractive to investors for the same reasons also you will eventually hire employees and probably grant them stock options and those stock options will have vesting and it just is a lot better when you lead by example all right another personal favorite I signed a

legal document but I was too busy to read it so I have no idea what it is this happens a lot if this is a big mistake we see founders do this all the time and I mean we sympathize right the legal mechanics of your startup are the really boring parts of the process you can get away with not reading every word of your bylaws for example but you need to understand every provision in your founder stock purchase agreement you actually don't want to have anything happen with your company's stock that you don't know every word of and this is

actually a bigger problem it's not this isn't such a huge problem with formation documents it's a big problem with fundraising documents I can't tell you how many founders have told me they won't read a five-page safe so you want to get into the habit now of reading all of your company documents it's daunting it's legalese whatever read it anyway understand it it's a great habit to get into and then you'll know if it isn't signed okay my friend offered to work

for my startup for free so I'm going to pay her with shares generally this is a mistake because people who work for your company need to be paid money obviously compensation packages can include an equity component but paying with only stock is not a good idea the exception is if your friend can be hired by your company as a consultant or independent contractor those are the same thing and it's okay for consultants to be paid for services with just stock but you have to first get comfortable that your friend

is properly classified as an independent contractor and the rules in California about this just changed and got stricter also you'll want to make sure you paper this relationship with a good consulting agreement because you really want to make sure that the company owns all of the consultants work product you don't want to wing it okay this is a big one my co-founder and I don't want to work together anymore so this is sometimes a small problem and this is sometimes a fatal problem startups die sometimes because of this

and it happens unfortunately a lot and it can be overwhelming the 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 CII a that clearly demonstrates that the company owns all the IP that's created doing these things can significantly decrease the legal drama around breakups I don't know what decreases the emotional drama but that decreases the legal drama my

company has some employees and I promise to issue them stock this isn't a problem as long as you take action on it sooner rather than later and the appropriate action to take is to adopt a stock incentive plan and to grant stock to these early employees a stock plan as some of you probably know is like a 15 to 20 page document it references a specific number of shares of your company's common stock that are allocated to the plan the company can issue restricted stock or stock options pursuant to the plan but what you need

to know about stock options is that if you grant stock options you have to get something called a 409a valuation and most startups don't want to do this until after they've had a fundraising event so you can issue restricted stock to employees under this plan and they will also have vesting and they come with a whole host of tax and securities rules which is why the plan needs to be 20 plus pages long but the reason to not wait too long to do this is because the longer you wait the more expensive your

stock will get and so you want to grant yours you want to give your employees cheap stock or as cheap as you can because expensive stock is not very incentivizing I got a cease and desist letter another company says my company is infringing on its trademark this is a problem an early-stage startup it 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 it go let the name go pick a new name and get back to work related to this a few of you emailed the question about whether or not it's worth it to register your company's name and get the official trademark generally we consider a trademark registration to be something that can wait it's a nice to have and

not a need to have in the early days of your startup all right finally I picked an awesome name for my company but I have to pay 10k to get the domain this happens a lot so again don't fall in love with the name that may cause you to make bad decisions no matter how great that name is it is a bad decision to waste time getting into a lawsuit with a company that claims you stole its trademark and it is usually also a bad decision to spend a ton of money on a domain so do your research on names like

restric don't just research the PTO research it and then do whatever is cheapest and most efficient and move on okay that's it so now we're gonna have John and Jason come up and we okay so what we did is we took you guys emailed us a bunch of questions and we pulled we pulled some out we edited them 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 gonna ask you the first

question when you're ready good okay when does the 30-day IRS clock for filing an 83-b election start and you might wanted to start by describing what an 83-b election form is in case some of the new here doesn't know yes so to 83-b election is a tax election so when you buy stock if you don't make an election - what happens is you're taxed on the stock as at best so each vesting period whichever the amount of stock that that's whatever the value of the stock is at that time you incur an income tax it for that but in

83-b election allows you to be taxed on the difference between the value of the stock and the the price that you pay for the stock on the day that you actually buy the stock so it's actually by default in most cases the best thing to do if when you are start-up founder is to actually make the election so that you know because you're gonna be paying a very nominal price for your founder stock and so there's going to be no income taxes because you're going to be you know if you make the election because you're gonna be paying the same amount so you'll pay like a dollar for your stock and then basically say the

stock is worth a dollar and then you make the 83-b election and then there are no more taxes that are going to accrue on your vesting as a stock grows and value so if you don't do that which does happen from time to time you can be faced with a a very large tax liability if your company ends up becoming very very valuable as your stock vests and the time period from when the 83 below should be election the 30-day period that you have to make the filing it starts from the day that you actually buy the stock so that is a hard deadline it includes calendar days it's not a business day period and if you miss it

there's really not much you can do about it there are some sort of things that you can do to mitigate the tax liability that when if you work with tax lawyers but if you miss it it's some it can be pretty bad so that's one thing they definitely remember okay and I will add that this is a good reason to pay really careful attention to the date on your restricted stock purchase agreement and the and it should be the same date that you write the check for the one dollar paint you just pay attention to that like you want that all happening on the same time so you're not really worried about like oh my gosh what's my actual

start date and the other thing I'll say about that is 83-b election forms need to be saved by the company as well so the individual founder is gonna save that election form for their own tax returns and their own files but the company needs to keep a copy - you put that in your shared Dropbox you make sure it's signed you make sure it's dated and you save it in that safe place and the company has it you know forever that's a really important it's one of the few things that can't be fixed that's also an important well yeah I mean Jason was just saying like there are some there are some fixes sometimes

but they're painful and really expensive and people look at it in diligence this is actually one of the few things to remember yeah if you remember nothing else from this file you're 83-b election forms okay so we also got a lot of questions that touched on a variety of immigration issues so and here's a here's a sample question we got I'm in Canada can you help me get a TN visa so I can work on my startup in the US Sean wanted to take a crack at that this is a difficult you know Jeff said we know

everything but immigrations not something that were experts on and this is a situation where you need to speak to an expert especially if you have situations where are you going to be you need to be employed as Caroline was saying earlier by your company and if you can't work in the US you can't be employed because it's illegal and you better off speaking to an expert now immigration is particularly tricky you know it's a political issue obviously now so it's the landscapes always changing but it's also it's more of an

art than a science so it's always been very difficult for us jumping in knowing the basics to talk about immigration we're really not experts in this area and you definitely need to speak to an expert yeah okay um Jason should I be a c-corp or an escort c-corp so if you just file in Delaware you're trying a c-corp by default in order to actually be an escort you have to make an election on a tax form and the difference between the two of the C corporis corporate escort was passed through taxation says tax transparent so any income earned by the

corporation is then passed through to its owners the C Corp cuts off the income with the level of the corporation and corporation that pays taxes and so the reason why you want to be a sequel is that's the kind of entity that investors are used to investing and II also when you actually take investment from outside investors it will blow the S corp election most of the time anyway okay John how much equity should we save for our first employees our key hires during the incorporation of the company it depends

on the size of the company and how many people you need to hire I would say you know the standards are probably 10 to 20 percent people think is going to be you know saved for employees but it's definitely specific to the company so I would you know this is a situation where it's very easy for me to say hey you should be very generous with your employees and and you know have a lineman and make sure they're benefiting from the upside and the company it is something I believe very strongly and

especially if you have good employees you want to keep them you want them aligned with your mission so it's worth you know thinking about this in a long-term view having the long-term view and and you know setting up everyone for success the online platforms Clerke and stripe Ellis well I know Clerke for sure has you can actually create a stop out option pull at formation if you want to so if you've already thought that far ahead and you know you want to have a plan set up you can do that up formation

I would say though the vast majority of companies actually wait and don't adopt a stock option plan so they're a little further along Jason is it illegal to have unpaid interns generally yes so you just went over this in the fundamentals so you want to avoid unpaid employees interns are going to be generally considered employees and then there are some exceptions you can you can use or take advantage of for giving people on you know sort of college credit if they're college interns or things like that but you know that's going to take

some work on your part to actually learn those rules in your project you need to talk to a lawyer for those things and if you want to get people the help of people and you know just pay them in from in the form of equity again you know that was already covered by Carolyn's presentation it could be contractors but there are standards for when somebody is classified as a contractor versus an employee and those standards got just recently Mort are harder to to satisfy given some of the California Supreme Court rulings you know YC company ones that have fourteen interns fourteen unpaid interns that was

a big mess okay John there's a ton of advice out there for how to properly structure for a non-profit for a for-profit startup what about nonprofits what's the best legal practices for starting a non-profit startup I'm getting all the questions that I can't answer it seems fair the but nonprofits are also completely different it's a different animal it's it's different from for profits I mean the government doesn't favor nonprofits

because the government likes to get taxes nonprofits are tax free so if you think about it's going the government's going to make it difficult to become a non-profit do you have to go through all these steps and fill out forms it takes like nine months I'm not an expert on it YC is not an expert on it we do we do donate to nonprofits we accept nonprofits in our in our program that said it's always been you have to have a public your company has to be set up for

the public good there are certain disclosures you need to make you have to disclose the top five salaries in the nonprofit and I'm certainly not an expert in this area so I don't want to touch it on on it anymore but it's it's a completely different animal you're out there soliciting donations from foundations rather than raising money from VCS so it is a totally different beast Jason can I invite a stranger to be a partner so that question probably answered itself generally you want to

work with people that you can trust and know and so you know before you prey on somebody as a partner co-founder you you kind of want to understand how well you're going to work together whether you can actually build something together whether you're going to actually get along so I think the answer to that is not if you really want to make sure that you know you're going to be successful and even if this the person asked this question meant partner like advisor or some other not like a co-founder but they meant

something else I wouldn't even I would say don't ever work with a stranger right and this goes back to what I was saying about founder breakups I mean that is that's a recipe for disaster to work with someone you've only just met because we've seen brothers break up like the founder breakup goes through all levels of relationships so you're gonna stack the deck against yourself if you have a stranger involved John what are key factors to consider while determining what country should want to register their parents company in the

quick answer is where where's your market was your business who were you you know most people set up in the US because they're attacking the US market which is a big market if you're selling something in India you should be in India most likely the problem with this question like the parent-subsidiary question to me I always think like when I'm talking to startups keep it simple like get you know this lecture seems a little dry and it's a little you know it's the legal mechanics not the most

exciting thing but it's really pretty simple if you think about it's like hey you know form your corporation keep the be serious keep you documents like don't have one person in squirrel it away buy your stock from the company never forget your 83-b that's the one thing I want to drill home you know after you buy your stock evaluate e3b that's about it like there's not that much to do as long as you're serious with parent subsidiaries complexity when I hear that from from companies early on I just want to run you're gonna make it

extra hard on yourself with that kind of stuff Jason with the explosion of legal services tech it's possible I may not need traditional counsel until a sophisticated angel or institutional round when do you advise your companies to stop using these services and migrate to a traditional law firm how would you distribute the work between the two yeah so there there are a lot of good tools out there right now so you could use Clerke you can use stripe out low so you can get pretty far with them and you know I think when you get to the point where you're raising

significant amounts of capital you definitely should get a lawyer and because a lot of the agreements are going to be custom and bespoke your there's going to be some negotiation when you're just incorporating and setting up those services we'll take care of it you could probably go without counsel you could certainly get counsel if you want especially going to do something a little bit more custom when you get to the point where you're issuing stock to employees you probably do want to get you know somebody involved just because there are some things that can go wrong if you don't do it things perfectly and you also don't want to be careless about having written

promises for stock with various people so sometimes outside counsel there can be very helpful making sure you you're not out over your skis when you're talking about things like that with people so John this question is kind of similar to the one I just asked you so it's probably the same answer but you can reiterate from a legal perspective can i form a start-up and then sell it while having a full-time job if so what things should I consider I also think Jeff touching this earlier but this is this is kind of asking the impossible

there's no way or I've never seen any company started part-time on weekends holidays you know become like a giant company maybe you know you can do that on a small scale but this is a you know we're asking you to start a company out of thin air and that is very difficult to grow a giant cut it this is an all-consuming full-time thing it's not like oh I'm going to do this as a hobby so I don't want to sound dismissive but

I just think that's practically impossible I wouldn't even think that way like this isn't a part-time gig Jason our patents ever worth applying for so this is a this is sort of like oh that's good you could talk a very long time about patents and whether it's useful to or worthwhile applying for them that the short answer is so pets are useful for protecting your technology especially from competitions and copying your technology your technology matters if you're pursuing a

software startup you know or tech and able to enter Internet company patents tend to matter less there's less protection under patent law for software patents anyway and so your success going to be determined not by their protectability of your property under law but rather your execution under the software if you're pursuing a life sciences startup they're duplication is actually easier for competitors to to you know execute on so patents tend to be more important and you know if you have questions about you know the specific things that you're

doing technology wise and whether it falls into the weak patent or strong patent protection bucket you should definitely consult with a patent expert or a lawyer on that but the last part of this is that no company is you know sort of you know raised money purely on the strength of their patent portfolio it's always going to come down to you know you know or how good is the founding team you know can they execute on their vision you know the Pats are just one part of the puzzle John I'm thinking about setting up an

advisory board and wonder if advisors should have equity in my experience advisory board some more non-us thing like non Silicon Valley thing maybe in Silicon Valley we see advisory boards for the life sciences companies you would see the you know academics and professors try to legitimize the the company as advisors and get a little stock but this is not something where you know it's not something we give

stock to people we're with them with without thought it's more I think the best quote on advisors somebody said was like advisors are investors who want stock for free and that's kind of how I think about it like you know people should invest ideally instead of advising for free shares and I know this is in like a one-size but some situations like I was saying it's appropriate maybe a life sciences

company and you can have consultants who get stock but it's mostly a situation I try to avoid Jason what have you seen founders do when they had to cut off and fire a co-founder who was a personal friend that has anybody here ever had a roommate who's been a friend it's kind of like that right so sometimes you know it's better to not do certain things with your friend so that you can stay friends and so if you have started a

company with a friend of yours and it's not working out and it's oftentimes because you guys have different ideas about the direction that company should go in or somebody's working just a lot harder than the other person is it's usually better to just solve that problem or you know basically you know resolve that problem as soon as possible rather than letting it be something that you think or hope will work out over time and letting it fester because not only does it hurt the company it hurts the friendship too so it's it's generally better to kind of get to a quick resolution you know you don't want

to stall on that no that's something I would add the biggest mistake we see is people delaying and thinking Oh things gonna work out and this is a friend things gonna change it's usually best that you just end the relationship it's now working and the startup relationship the startup reserve reserve different exactly okay John what is the best methodology for reviewing potential loopholes in your privacy policies in terms of service this is an area where

if you're going to spend money early on and a lawyer and you have something that's it's tricky that's a sensitive startup topic it's worth spending money on a lawyer but there are excellent services for privacy policies and Terms of Service on the internet right now I you Bend as one and all the major law firms also have privacy policy generators but if there's something specific or I you bend it I'll send out

on the resources tab it's definitely important it's required if you have if you're taking somebody's information you have to have a privacy policy up on your website or your app in California so this is something you need to do there are good services in certain circumstances you're going to need to hire a lawyer in this situation so as many of you probably know if you are collecting personally identifiable information from anyone in the EU you're

governed by the GD P R and that's a huge quagmire and so if you fall into that bucket even though some of these privacy policy generators are fantastic they're not going to get there probably I mean unless someone's really done a great one they're probably not going to cover all the stuff you need to know for GD P R so you would probably want to get a lawyer for that let's see Jason should we work 18 hours a day as a co-founder and founder of our startup how can we

measure and manage our commitment status for our product so the advice we give all of our startups is to still exercise sleep and you know have some semblance of a life in terms of like maintaining some of your relationships and friendships so 18 hours a day is not something that we would recommend really except for maybe like short Sprint's where you need to get something out and you know just remember that this is just gonna be a multi-year journey and where you're building a company so to use the tired cliches it's a marathon not a

sprint you don't wanna get sick okay John should we have a shareholder agreement and what should be included in a good shareholder agreement shareholder agreements are really a non-us type of document it's you it's a document describes in detail what happens when when their departures severance bounder breakups or all different types of situations and often that can be very detailed the ones I've seen Canadian companies have come in with them but it's really a foreign thing not so much

a US goes back to what we were saying or what I was saying earlier you want to keep things simple there's no reason to have this giant prenup in a situation for a start-up I mean chances are if things go wrong with a start-up there's there are no assets to divide anyway it's not like a marriage using the prenup oh no except when you break up except when you break up in a marriage there are assets hopefully a house couch television whatever yeah

you know you need a prenup sometimes of course startups these detailed documents that I get from you know the Netherlands about what happens when a company breaks up with no assets seemed just like a waste of time to me overkill to clarify for some people so this I think that the person who asked this question was talking about the shareholder agreements that John was talking about which is among founders when you sell preferred stock to investors in like a series a financing there are shareholder

agreements and they do govern a lot of the things that he just talked about but that's between the company and the investors so that is different and that is of course a very u.s. thing so yeah so just to make sure people weren't confused about that okay our last question for Jason many companies have information about their rounds like price per share or amount rate raised displayed on pitch book CrunchBase and other sites given that this seems to be due to company charters and filings being publicly available is there any way to prevent outsiders from seeing

this detail about your company so that the the technical answer is yeah there there are ways there are methods you can use to actually conceal some of the information that the charters the charters the publicly filed document people can pay you know hundred dollars or whatever to pull down the Charter from Delaware and look at some of the details of your company so that's sort of like the literal answer but I think the larger answer is just it's not something that I would worry about early because it's it's sort of way down on the list of priorities in terms of what you need to sort of think about and plan for and look there are plenty of

companies that have this information listed at pitchbook they're doing fine and plenty of others are you know not doing fine because and it's not because they're on pitch Brooker not on pitch book it's because of other things so it's just I wouldn't spend a whole lot of time thinking about this so Jeff and adora I don't know how we're doing on time and whether or not you want to do any there QA are there any questions shockingly there

are why don't we take just a few questions okay all right yeah that goes that I'm not an expert a non-profit someone thinking oh thank you she's asking about be corpse which is a quasi nonprofit and for-profit corporate social social enterprise where you're part of your mission is is to help support the public good that's not

something I'm an expert in unfortunately many companies have been doing it recently it's much more prevalent I just I'm not really qualified just changes the fiduciary duties right so the whole goal of the coming the goal of your average corporation is you make money for the stockholders right B Corp is more like there's a social good so the fiduciary duties on the part of the management and the directors are different and like Jon said they're gaining in popularity so I think we're gonna see a lot more of them yeah it's not really ycs things so we don't I

would hesitate to give you any like advice about them but I know there's actually a couple good books about them I have one of them as I've read it but there's a lot of information out there about them um you know if not for YC is maybe but it could be fun yeah it could be fine it's just we haven't done a lot of them so we don't really have any data about what that looks like long-term one point about a B corporation is is you can imagine it might not be as

attractive to your typical venture investor so it depends what the goals for the company if you're looking to create a start-up which is high growth fast growth you won't generally see a B Corp and most investors probably look at that somewhat askance I will say we do have one recently that converted into a B Corp that had been around for like five or six years so that's something you could [Music]

don't because I don't worry later might be harder yeah could be done I just don't know the wisdom of it president Australian should I register [Music] a new chart you guys know [Music]

yes it is similar the question is a levy of a SAS company in Australia and you're attacking the US market but you're also in Australia you're not sure where to incorporate again like the the the key is like where are your customers it sounds like you have you're thinking about the US you know 100% sure and and I would just figure out like really where you want to be most you know from a practical standpoint again like setting up complex structures is really

what the question that we were talking about earlier and I have like a little aversion to that you know it could be a good situation where it makes sense to have a parent subsidiary structure for you but it's a little more complicated incorporate in the US and then have your Australian company be a sub but again you could just incorporate in the US and just sell into Australia like you could just not I mean if that's your market

and that's where you want to raise money just incorporate and be a US company we always suggest US companies it's much easier to fundraise in the US and much more favorable terms in my opinion so I always tend to push people to be in the US it's just better for the business long term [Music] these UI co-founders ended here

if you have to restart there's four in the same question raise money okay so his question was when you add new co-founders like later on maybe a year or so later do you have to restart all the original founders vesting schedule to match the new and the answer its no you do not so you put you and your original team of co-founders let's say you put four year vesting on your

founder stock and then a year later you find a fourth co-founder you think is great by the way be a little bit circumspect about throwing the word co-founder around like sometimes that person who comes a year later is just a key hire and not a founder there's a lot of emotional attachment to the word founder and in the Silicon Valley we all know why but like not everyone's a co-founder anyway but to answer your question no you guys will stay on the same vesting schedule the new person who came a year later will start four years on the day that he or she started at

your company now the thing that some of you probably already know is that when your investors come in they may decide they want to restart you all they would I mean unless you had absolutely zero leverage so not going to start you back on square one but sometimes investors look at your schedule and they say ah you guys only have about a year left that's not really enough for us can we put on another year so that happens every now and then and again it depends a lot on leverage but don't be surprised if that happens did that answer your

question [Music] so you talked about having basic culture we have employers on-site us and totally Beatles implied public happened in the u.s. NPD if we don't want to list an empty in the foreign country so the question was how do you hire outside the US when you have a u.s. yeah so the the

short birds unsatisfying answer is going to be that it depends on which country because each country has different sort of rules for who counts as an employee and who counts as a contractor and what you have to do in order to actually you know satisfy those rules and then also when you actually open up a significant presence in any sort of foreign country what you oftentimes have to do is create a local entity and sometimes that can be a subsidiary and sometimes it could actually just be something more simple like a local branch and again your menu of options sort of depends on which country you're going into so I don't

know do you have like a country it specifically yeah India so India typically what happens is there's a subsidiary that's created it's usually owned 99% by the American parent the Delaware parent and 1% you know or some other small percentage but two or one or two local Indian sort of Representatives and then that subsidiary is the one that then hires employees in aviation look at me so I think if you want to try and avoid that kind of structure you know yeah I'm

not an expert on Indian law you probably need to talk to somebody who actually has a license in India to actually advise on the employment issue because you know it just like the in the United States various countries have stronger or weaker protections for when you can classify somebody as an employer or not thank you guys very much so sorry to have to cut off I know there's a lot

more questions live here remember Darby Wong is from Clerke is having an AMA now tomorrow but it's open now you can post questions so if you have questions that that is an outlet and you can always work with your group to ask more questions just one more word on the part time question which has come up a few times and we discussed a little bit at the break the way I look at that it is certainly true that some companies are kicked off while people are working in a

full-time job but those aren't really companies yet they're just projects they're just ideas once you really start your company and all of the great companies have this feature you'll be on it full-time you'll be on a more than full time you'll be on at 120 percent so thank you all for coming in person and thank you for watching online [Applause] just a couple reminders there will be a

conversation with the founder of Y Combinator Paul Graham on Friday as well as the AMA tomorrow with Darby next week we're going to dive into product with the CEO of YC Michael Seibel and David recycle from Weebly on building product and product market fit there are also several great videos in the startup library on product that I very much encourage you guys to take a look at and lastly

login to the many of you already have post on the forum posting your group and figure out how it works hopefully it'll be good home for all of you and if you have any issues send an email to accommodate our at startup school org and everyone have a great day thanks [Applause] you
