Hey all! Many folks pitching to VCs think they need to hire lawyers or pay legal fees up-front in order to get a business entity. Others have asked me what type of entity they should set up (LLC vs Corporation).
I'm on a mission to share as much entrepreneurial knowledge as possible to lower the barrier of entry into the venture startup world. This won't apply to cash cows or folks who are building companies who don't need / don't want to raise from VCs.
Side note 1: that this advice will not apply to all venture backed startups in the United States. I'm authorized to work in the US & I was planning on only pitching to US / European VCs . . . so this advice is based solely on my past experience.
Side note 2: I already posted this on my personal blog and my YouTube channel. However, I wanted to try the Reddit audience as well. Here is a copy / pasta of what I posted already.
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Legal services
What many folks don’t know is that tech law firms are willing to “front” services in exchange for your long-term partnership. This is a term called “Deferred Payments”. The way I did this was I pitched my startup idea to many different tech firms via warm introductions from my network. Afterwards, a few came back to me saying that they liked my idea, and they were willing to work with us for free until we raised our seed round. We agreed to $600K as the amount we’d need to raise for us to start paying them. It’s a win-win situation!
Now . . . that’s not to say that you should just blindly go that route. Remember, you still owe the law firm that money! It’s simply differed.
The first question to actually answer here is if you should or shouldn’t employ the help of a lawyer. If you have multiple founders with differing equity structures (i.e. 20%/30%/50% split), my suggestion is to always use a lawyer. They’ll serve as a trusted third party between everyone, and as your organizational complexity matures over the years, that law firm can provide the best advice because they know how everything started. Additionally, if you’re looking to start something outside the “vanilla” industries (i.e. reviving the woolly mammoth), I’d advise towards using a lawyer.
In most other cases, you can use a service like Clerky or Stripe Atlas. It’s a lot cheaper!
Please do not use a no-name SaaS website for a service like this. The problem isn’t that they’re “fraudulent”. It’s that the Delaware Secretary of State can sometimes take months to return your paperwork. If you’re using a non-name-brand service, their customer support can simply ignore your pleas to expedite the shipping of your paperwork. Oh, and on that topic . . . if Delaware says they’ll take 1 week for something . . . expect 2 months+.
Incorporation
You should almost always incorporate yourself as a Delaware C Corporation. I know — it’s very specific and odd. I’ll defer to Y Combinator to explain why this is so: Quote from “Tips on Company Formation and Fundraising":
“When you are thinking about an LLC versus a corporation, founders often have family members, friends who are lawyers or whatever, chime in and say, “This is absolutely the best thing for you, tax-wise.” And that may be true. If you’re going to be a lifestyle business in a particular state and you’re not going to get big, that may be exactly the right entity for you.
But we think, you know, assuming you’re planning for success…and success means that you’re going to be a big company with possibly venture capital investors and you’re going to get all this outside money in…that is not the right structure. So what you’re just doing is optimizing for taxes, you’re not optimizing for success. And that’s just, you know, companies that get an outside investment need to be C Corps. I mean, of course, LLCs can get outside investment.
But the kind that, you know, that grow here, you know venture backed companies are C Corps. The reason we choose Delaware…I mean, it’s okay to be a corporation in any state. Delaware is the default for lawyers, corporate lawyers, you know, mostly everywhere, primarily because public companies are much better off in Delaware and there’s a whole…it’s because there’s a robust case law…the Delaware Chancery Court has, you know, all this case law, deciding all these, you know, statutory and fiduciary duty and all this kind of stuff is important for public companies.
It trickles down to private companies because Delaware’s statute is just so familiar to so many corporate lawyers. It’s easy to interpret, and Delaware is just sort of the go-to place. It’s also extremely administratively easy to be there. They’re set up to do everything fast and easy and cheap.”
Banking
Now that you’ve got all your legalities figured out, you need to set up your corporate financial operating system. You’ll need a checking account to accept all the incoming VC funding you’re about to get, and you should optimize for credit card rewards on your day-to-day spend. These are my personal recommendations for these services.
Mercury: best for primary checking, savings, and paying bills that don’t accept credit card
Brex: best for spending on restaurants, software, & ride share
Ramp: best for spending on everything else
The reason why you should sign up for these “tech-focused” financial services (outside of the rewards) is because they designed their entire service to cater towards you. You’ll be underwritten based on VC dollars raised instead of cash flow (most seed startups don’t have cash flow). You’ll get rewards to AWS. And much much more!
Full series of educational content I'm creating on "how to raise a seed round in 2023". Not all content are complete, but in true spirit of the startup mindset (move fast!) . . . I'm posting my drafts before they're done.
I'm on a mission to share as much entrepreneurial knowledge as possible to lower the barrier of entry into the venture startup world. This won't apply to cash cows or folks who are building companies who don't need / don't want to raise from VCs.
Side note 1: that this advice will not apply to all venture backed startups in the United States. I'm authorized to work in the US & I was planning on only pitching to US / European VCs . . . so this advice is based solely on my past experience.
Side note 2: I already posted this on my personal blog and my YouTube channel. However, I wanted to try the Reddit audience as well. Here is a copy / pasta of what I posted already.
----
Legal services
What many folks don’t know is that tech law firms are willing to “front” services in exchange for your long-term partnership. This is a term called “Deferred Payments”. The way I did this was I pitched my startup idea to many different tech firms via warm introductions from my network. Afterwards, a few came back to me saying that they liked my idea, and they were willing to work with us for free until we raised our seed round. We agreed to $600K as the amount we’d need to raise for us to start paying them. It’s a win-win situation!
Now . . . that’s not to say that you should just blindly go that route. Remember, you still owe the law firm that money! It’s simply differed.
The first question to actually answer here is if you should or shouldn’t employ the help of a lawyer. If you have multiple founders with differing equity structures (i.e. 20%/30%/50% split), my suggestion is to always use a lawyer. They’ll serve as a trusted third party between everyone, and as your organizational complexity matures over the years, that law firm can provide the best advice because they know how everything started. Additionally, if you’re looking to start something outside the “vanilla” industries (i.e. reviving the woolly mammoth), I’d advise towards using a lawyer.
In most other cases, you can use a service like Clerky or Stripe Atlas. It’s a lot cheaper!
Please do not use a no-name SaaS website for a service like this. The problem isn’t that they’re “fraudulent”. It’s that the Delaware Secretary of State can sometimes take months to return your paperwork. If you’re using a non-name-brand service, their customer support can simply ignore your pleas to expedite the shipping of your paperwork. Oh, and on that topic . . . if Delaware says they’ll take 1 week for something . . . expect 2 months+.
Incorporation
You should almost always incorporate yourself as a Delaware C Corporation. I know — it’s very specific and odd. I’ll defer to Y Combinator to explain why this is so: Quote from “Tips on Company Formation and Fundraising":
“When you are thinking about an LLC versus a corporation, founders often have family members, friends who are lawyers or whatever, chime in and say, “This is absolutely the best thing for you, tax-wise.” And that may be true. If you’re going to be a lifestyle business in a particular state and you’re not going to get big, that may be exactly the right entity for you.
But we think, you know, assuming you’re planning for success…and success means that you’re going to be a big company with possibly venture capital investors and you’re going to get all this outside money in…that is not the right structure. So what you’re just doing is optimizing for taxes, you’re not optimizing for success. And that’s just, you know, companies that get an outside investment need to be C Corps. I mean, of course, LLCs can get outside investment.
But the kind that, you know, that grow here, you know venture backed companies are C Corps. The reason we choose Delaware…I mean, it’s okay to be a corporation in any state. Delaware is the default for lawyers, corporate lawyers, you know, mostly everywhere, primarily because public companies are much better off in Delaware and there’s a whole…it’s because there’s a robust case law…the Delaware Chancery Court has, you know, all this case law, deciding all these, you know, statutory and fiduciary duty and all this kind of stuff is important for public companies.
It trickles down to private companies because Delaware’s statute is just so familiar to so many corporate lawyers. It’s easy to interpret, and Delaware is just sort of the go-to place. It’s also extremely administratively easy to be there. They’re set up to do everything fast and easy and cheap.”
Banking
Now that you’ve got all your legalities figured out, you need to set up your corporate financial operating system. You’ll need a checking account to accept all the incoming VC funding you’re about to get, and you should optimize for credit card rewards on your day-to-day spend. These are my personal recommendations for these services.
Mercury: best for primary checking, savings, and paying bills that don’t accept credit card
Brex: best for spending on restaurants, software, & ride share
Ramp: best for spending on everything else
The reason why you should sign up for these “tech-focused” financial services (outside of the rewards) is because they designed their entire service to cater towards you. You’ll be underwritten based on VC dollars raised instead of cash flow (most seed startups don’t have cash flow). You’ll get rewards to AWS. And much much more!
Full series of educational content I'm creating on "how to raise a seed round in 2023". Not all content are complete, but in true spirit of the startup mindset (move fast!) . . . I'm posting my drafts before they're done.
- What you need to prepare (blog version) (podcast)
- How to turn your startup idea into a real business (blog) (podcast)
- How to build the best seed stage pitch deck (blog) (podcast)
- How to focus on the “right” key metrics (podcast) (blog)
- How to “wow” investors in your startup pitches (blog) (podcast)
- Understanding the SAFE (financing documents) (podcast)
- How to plan your financials around your seed round