BC STARTUPS
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Today I want to talk about the legal aspects of startups. How to set up? How to think about legal costs?

Fun!

Read on >>

 1) Lawyers are expensive -- oof! A startup lawyer can cost you $300-$1k per HOUR! An associate paralegal may be slightly cheaper. But still pricey.

What do you need from a lawyer?

-company setup costs
-doc creation and review for financing rounds
-exit negotiation
2) For the purpose of this thread, we're just going to focus on setup costs, because this is where I see the most mistakes.

Once you get going, you may quickly realize you need a better lawyer - hah - and that generally helps w/ solving for financing rounds and exits
3) If you want to potentially raise money from VCs, you'll want to set up as a Delaware C Corp. If you don't ever want to raise from VCs, an LLC is fine.

Lots of ppl start out as an LLC because you can get tax benefits if you are not profitable.
4) But to me, if you know you want to raise VC money, it feels a bit penny wise / pound foolish, because you will need to spend $$ to convert your LLC to a Delaware C corp.
5) Why don't VCs invest in LLCs?

Because of taxes. LLCs are pass-through entities. So if your company makes (or loses) money all of your investors (yours partners) will be able to apply that to their personal taxes.

This can be ok for your angel investors.
6) But a fund like mine has < 99 investors in my fund!! I guarantee you that none of them want to be doing extra tax work to report the income (or losses) of one of our startups.

It's too much of a headache for everyone.
7) So VCs literally will NOT invest unless you are a C corp (or unless they are really a family office with just one investor). It's not an excuse.
8) So if you want to shoot for VC money, set up a Delaware C corp. These days there are a few options: 1) templated services, 2) boutique lawyers, 3) big firm lawyers
9) The templated services (like Clerky or Stripe's Atlas program) are super cheap and will spin up docs for you easily.

There may need to be adjustments down the road, but IMO, you can get going and fix later if need be.
10) But if you are going through a financing soon, you'll definitely want a lawyer to review everything. A boutique law firm is usually a lawyer on his/her own.
11) A boutique lawyer typically is cheaper (because there's low overhead -- no need to pay for a fancy lobby) and generally more personable IMO.

Look for someone with big law firm experience who left to start his/her own firm.
12) A big law firm is like a Gunderson. Or a Wilson Sonsini. They have lots of lawyers. And lots of experience. And big hourly rates too. :)
13) Whether you go with a big firm or a boutique firm, make sure your lawyer has EXPERIENCE w STARTUPS! I cannot stress that enough.

Esp if your company is NOT in Silicon Valley or NYC, I would actively seek a lawyer in Silicon Valley. So many inexperienced lawyers mess up.
14) Now you may be wondering, why would I pay for a big firm lawyer if I could find a cheaper boutique lawyer w big firm experience?

One thing big firms can provide are engagement letters that give you some services for deferred fees.
15) If a lawyer is impressed by your startup enough, they may offer you a certain number of hours / services for deferred payment. And after that, if you raise $X, you are on the hook for paying them back at their market rates in cash.
16) If you can get one of these deals from a big firm, that can be great, because if your company goes under before you raise $X, you are not out of pocket on your legal fees.

Also you can shop around. Much like how you can shop around with VCs, you can approach many big firms.
17) And once you have a deferred payment offer from one firm, many firms will put forth their best offers.

Things that are negotiable are:
-cost of services / amount you can defer
-min raise amount before you need to pay
18) Note: this can also be applied to funds. Funds typically have much heftier legal expenses, and this applies to funds as well.
19) However, it's important to note that if you have an offer for deferred payment, it may *feel* free but it's not actually. Hah.

That is how you become a client at high rates.
20) So sometimes it can better to pay out of pocket w/ a boutique firm (who doesn't give these offers) because their rates tend to be significantly lower. Nothing is ever free in life.

I've done both and it depends a bit on your own cash situation.
21) Ok, so let's say that you pick a lawyer. Your lawyer will help you incorporate, set up your stock plan, and employment agreements.

With this, you're in business! You are a legit company.
22) Things to note - you and your employees will have 4 yr vesting in place. Meaning your stock grant will only come to maturity if you stay at the company all 4 years.

There's a 1 yr cliff, which means you get 25% of your grant after the first year but nothing prior to that.
23) Without vesting, VCs won't want to invest. Or they may negotiate with you to add vesting as part of an investment agreement. They want you and everyone to be incentivized to work on the company.
24) You and your employees will also assign IP to the company. Meaning, anything you develop / design / create, belongs to the company.
25) Lastly, you want to make sure you have a lawyer you can trust on business advice as well. You may have to lean on your lawyer to give you the pros and cons later on for various financing offers or exit opportunities.

Sometimes you may need to switch lawyers.

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Elizabeth Yin
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Some gems from @MacConwell of @RarebreedVC in Clubhouse right now:

1) VCs are looking for startups that can get to $100m / yr in rev by yr 7-10.

VCs need this kind of return in order to produce great funds.

2) And so many companies won't get to this level - and that's not a bad thing - but then it means you should be thinking about trying to get going w company revenue since you can't count on VC backing.

3) someone asked about age and fundraising & do accelerators help?

Age doesn't matter. But just make sure no one is taking advantage of you. And as such, accelerators can help sometimes w that guidance.

4) Someone got a rejection because he had a teddy bear in his room (side note: what investor says that?!?)

Mac says he's been there and has heard that saltiness. But you're going to get a lot of nos. And you gain more leverage w more progress and traction. So just keeping going.
INTERNET
Elizabeth Yin
Elizabeth Yin
@dunkhippo33
Some wed night thoughts on investor “value add”:

1) At the end of the day, money is a commodity. That mere fact should make every vc shudder.

It is amazing how many ppl (incl myself) clamor to get into a commodity business!

2) As such, to differentiate, different investors provide other things beyond money. Sometimes it’s community. Sometimes hiring help. Sometimes expertise or sector-focused networks. Etc

3) And some VCs are truly value add! For example, if I had an edtech co, I would hands down raise from @jwdanner - he has been there as an entrepreneur, built schools, and invested in so many hit edtech companies.

4) But at the end of the day, regardless of who invested in you, it’s the founders + team who are doing all the work.

5) when I think about what I’ve done for my own founders, it’s ranged from doing intros (mostly to other investors) to cust acq advice to feedback etc

But the reality is - all of my founders would’ve figured out how to get that intro or that piece of advice w out me
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Elizabeth Yin
Elizabeth Yin
@dunkhippo33
Saturday thoughts on market pull. What is it? How is it different from Total Addressable Market (TAM)? And what ideas tend to have strong market pull?

A thread >>

1) First: "Market pull" != market size.

IMO (and most VCs will disagree!!), market size (TAM) doesn't *really* matter. But market pull DEFINITELY does. For that reason, I've almost never asked a startup about TAM.

Why?

2) First, what is TAM?

TAM is a sizing of how big your market is. A good way to estimate this is - if you can get to all potential buyers and based on how much $$ they are worth to you, how much money can your company make if you took the whole mkt?

3) An example: Say we run an e-commerce site that sells hippo food. TAM in the world:

-1000 zoos have on average 3 hippos = 3000 hippos.
-Each hippo eats $100 worth of food each day
-365 days * $100 * 3000 hippos = $110m per year globally

4) But, we'll come back to this.

Why I don't like TAM - it doesn't take into acct a few things:

A) how hard it is to get customers
B) how much more you can upsell once you have customers
C) how fast the mkt is moving up or down
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Elizabeth Yin
Elizabeth Yin
@dunkhippo33
Saturday thoughts on funding: Where it helps. Where it doesn't. And how it affects team, success, and PM fit.

This is just my $0.02 after looking reviewing 30k+ early stage startups personally and having led 350+ investments across 2 VC firms & as an angel.

Let's begin! >>

1) Money is great to have in building a startup (for the least dilution and pain possible) That's true and always will be true. 😆

But just like how money can't buy you happiness, it also can't buy you PM fit.

2) PM fit is the holy grail for software startups. (we're not talking biotech - if you have a cure to cancer, I guarantee you everyone wants it).

But for software startups, it's unclear if ppl want your product at your price pt.

3) If you don't find PM fit, in this day and age, you will be able to get some sales. Maybe even say $1m in sales (or more!) per year, and you can still make a living.

But having sales does not mean that you have a repeatable customer acquisition process that can be sustainable

4) As an aside, that is why we invest at pre-seed & don't care about startup traction, because I don't believe traction at the earliest stages suggest PM fit. Traction only shows that a founder can execute (& that's impt too) but there are other ways to assess execution earlier.
STARTUPS
Elizabeth Yin
Elizabeth Yin
@dunkhippo33
Today's thread is a continuation on *how* you generate momentum in fundraising.

Here's a rough conversation I had with a founder (called 'C') over the course of days a few months back.

Read on >>

1) C: I'm having trouble raising. VC A and VC B are taking so long to get back to me.

Me: Oh, when did you meet w/ them?

C: 3 weeks ago.

2) Me: Oh, are you mtg w/ anyone else?

C: No, I got busy working. I had all these sales calls to make.

Me: That's the problem - there isn't a reason for them to move quickly. There's no investor at the table.

3) C: But I have all these sales calls to make!

Me: I really don't have a great answer for you here. This is probably the hardest part about fundraising - juggling your actual job w/ your fundraising job, which is full-time too.

4) Me: You need to hand off your sales calls to your co-founder. And then you can do mtgs back to back.

C: Ok...

[some time passes]

C: Ok - I'm ready.

Me: How much do you want to raise and what are you using the money for?
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when we put our Fast Checkout button on websites LOTS of people start using it to buy things

our goal is to put out Fast button on EVERY website in the world

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we already have some of the best in the world, our VP of engineering built much of Apples identity infrastructure before building Uber's new commerce stack

we engineers who have spent decades among the earliest engineers at LinkedIn, Nest, Google, Cisco, Lyft, Uber & more

our team have built identity, commerce and payment systems that support BILLIONS of people, and they are now building the next platform to do that: @fast

we have a chance to fix commerce, to fix the way the internet works, for BILLIONS of people

we need more help, we need your help

there is not often an opportunity as big as this, make the best career decision of your life and get ready for huge professional growth

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