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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@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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@dunkhippo33
Today's thread is on the affiliate business model. Many years ago, I used to be an affiliate marketer. If there is any way to get schooled in marketing, becoming an affiliate marketer is probably the best way.

What is affiliate marketing and why should you care?

Read on >>

1) Affiliate marketing is selling products or generating leads on behalf of other companies and getting paid a commission for those products.

2) Some notable examples you've seen before:

NerdWallet - you read their articles on best credit cards. You click on a link to one of those cards. You fill out an application. They get paid for delivering that lead to the cc company.

3) In https://t.co/kSfWS69ybp - same thing. Any of their financial products -- you fill out an application, and https://t.co/mCrBT43mOj gets paid for that.

But the affiliate revenue model applies beyond financial services products.

4) Wirecutter -- you see a neat product they review or talk about. You click through and buy.

Wirecutter gets a cut of that transaction.
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Elizabeth Yin
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@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
A thread on employee equity in early stage startups -- what are the compensation norms? What every early employee should ask? Some thoughts on whether the structure is fair.

Read on >>

1) First, there are NO NORMS! Hah. I have literally seen everything from giving early employees no equity to giving employee #1s near co-founder level of shares.

But what is more common than not?

2) In the Silicon Valley, if you're hiring your 1st employee, & you've raised NO $$ & are paying very little (e.g $0-$10k / yr or thereabouts), your first employee is basically a co-founder.

And the equity tranche for employee 1 should be closer to a co-founder level.

3) For ex, a friend of mine gave his employee #1 10% (vesting over 4 yrs of course) of the business. This employee was only getting his housing paid for. And this was 10 yrs ago, so it was during the bust.

4) On the flip side, if you have raised some $$ & are paying employee #1 near mkt rate, typically I see around here ppl get 1-5% (w/ vesting).

Caveat - near mkt rate doesn't mean compared to Google or FB salary rates. I mean compared to "normal big cos"
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Elizabeth Yin
Elizabeth Yin
@dunkhippo33
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.
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I shipped all these apps in 2020. Most of them generated $0.

🎬 https://t.co/JAhXqsuu6h $0
🌍 https://t.co/BrNUAhfiIT $0
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🐞 https://t.co/aghOxYEcPI $1.99
👍 https://t.co/2JhJLe27pW $3,025 in 10 days.

But that's ok, just keep shipping! My stories👇

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💡 https://t.co/fZfL45uvVX is a platform to connect influencers with their fans. People says it's like @superpeer. But the only difference is it's all sync. Influencers don't need to commit their time to fixed slot. Fans pay to ask questions, influencers can answer at anytime.

Continuing Influenswer... I think the product has its potential. But for now maybe I didn't find the right niche to serve. Will re-evaluate it in future.
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@gregisenberg
10 reasons why I think now is the greatest time to launch a startup

You should probably consider starting something

Just listen to this:

You can start with the community

I’ve identified ~8000 communities that could be unbundled from Reddit

- They are thriving
- They could make you ~$1m/year of revenue
- You often need $400 max to build MVP to tap that untapped value
- It's fun

Sounds like a dream job to me

People in Silicon Valley don’t have an edge on you

SF held the monopoly on startups for decades. Now, being in SF doesn’t matter for 99% of businesses

Don’t let anyone tell you otherwise

The world is flat and is staying flat

Hell yeah. That feels good to say

You have 10x the amount of funding sources

You used to have to rely on VCs. Not anymore

To name a few:

- Fund via your community
- Fund via NFTs
- Fund via pre-sales
- Fund via tokens
- Fund via accelerators all over the world
- Etc

All of a sudden, you have 10x the options

Niche businesses can be worth billions

People used to laugh at niche. Why “go small” when you could “go big”?

The way to go big right now IS to go small

Large tech companies can’t be everything to everyone
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