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Dalton + MichaelDalton + Michael

How Great Founders Navigate Lawsuits & Regulation

In this special live recording of Dalton + Michael, the two discuss dealing with lawyers and regulations as a startup founder. There is a competitive advantage to really understanding the law and how to best collaborate with lawyers. Some of the companies discussed include Twitch, Napster, Kalshi, Erebor, YouTube and OpenAI. (This live recording occurred in late 2025) Dalton + Michael is brought to you by @Standard_Cap Dalton Caldwell on X: https://x.com/daltonc Michael Seibel on X: https://x.com/mwseibel

Dalton CaldwellhostMichael Seibelhost
Apr 13, 202620mWatch on YouTube ↗

EVERY SPOKEN WORD

  1. 0:00 – 2:20

    Founders’ lawsuit credentials: music streaming vs. live sports piracy

    1. DC

      I remember being in New York and, uh, like it was with Warner Music Group during the litigation, and we spent the whole day negotiating, and they're like, "Hey, you wanna go to the Knicks game tonight?" And so I went to the Knicks game with the lawyers.

    2. MS

      While they're suing you?

    3. DC

      I don't think they thought it was a big deal.

    4. MS

      [laughs]

    5. DC

      That's how normal... That's, they were just so used to suing people. They're like, "Oh, you're a good guy. Let's go see the Knicks."

    6. MS

      Hello, hello. All right.

    7. DC

      All right. Hello.

    8. MS

      Our advice on lawsuits and regulation and dealing with the government. I think we've got decent credentials on this subject.

    9. DC

      Yeah, you gotta tell them what our credentials are.

    10. MS

      Yeah. Why, why don't you start? What are your lawsuit credentials?

    11. DC

      My first company that I started in two thousand and three was called imeem, and it was a music streaming site, and it, um-

    12. MS

      [laughs]

    13. DC

      And many of my early employees formerly worked at a company called Napster, and, um, not kidding, and there was a lot of overlap with the DNA. It was like the thing after Napster. And needless to say, we eventually got deals with the music industry, and that's a whole long story. But in the process, we definitely were in a lot of litigation, and so a lot of my life for a couple years as a startup founder was, uh, dealing with that stuff. And so sadly, I have credentials here.

    14. MS

      I represented the other end of the spectrum.

    15. DC

      [laughs]

    16. MS

      So I worked in a company called Twitch, and when it started, it was called Justin.tv, and I remember this moment where someone in Ohio decided to stream the Super Bowl live on our website, and I remember watching that part in the beginning that says, like, "This can't be rebroadcasted, retransmitted." [laughs] And I'm, like, watching this on my own website, and I was like, "Huh. Um..."

    17. DC

      Michael, to be honest, I, I definitely at least once watched the Super Bowl on your website. [laughs]

    18. MS

      We were pitching a VC, and he's like, "Oh, I wanted to go to the Masters," and I was like, "You can just watch it on our website." [laughs] Did not invest. So in the process, we got sued by the UFC, NBC, and then we got called in front of Congress to testify about sports piracy by the major, Major League Baseball.

    19. DC

      It was you?

    20. MS

      Yeah.

    21. DC

      You had to go in front of Congress-

    22. MS

      Yeah, yeah

    23. DC

      ...to talk about piracy?

    24. MS

      Yeah.

    25. DC

      Oh, man. [laughs]

    26. MS

      I think maybe what I would start with is what was your experience of being sued and kind of the speed of startups versus the speed of lawsuits?

  2. 2:20 – 3:20

    Why tech collides with old laws: from mechanical copyright to AI regulation

    1. DC

      The way I would frame this as it pertains to current modern startup advice is the following: New technologies often are encumbered, for better or worse, by laws that were created way before the technologies existed. And so dealing with copyright law, there's all this stuff about mechanical reproduction, which was the physical reproduction of records, and that's codified in the law. Again, I, I became an expert on this stuff, and trying to translate law that was about physical media to digital media was, like, totally dumb. I, I, I don't know. I could use other more colorful terms, but it, it, it was really hard. And the way I think this is relevant to right now is the attempts to regulate AI. In addition, a lot of our startups, our portfolio companies, have experienced tremendous change in the regulatory environment over the past few years. Fortunes are being made and lost based on what kind of laws are being passed and the sophistication ability for founders to navigate

  3. 3:20 – 4:14

    Case study: Kalshi and the idea of a pre-product government strategy

    1. DC

      these things. Um, just to throw out a couple of, of examples here, um, anyone hear, hear of Kalshi? Uh, you know the company? A few people. So look, they're, they're doing extremely well. Michael funded them for YC. That's his company. You're on the board or something, right? Michael is on the board of that company, and they basically spent years suing the government? I... Why don't you tell them? Why don't you tell them about-

    2. MS

      They only started suing the government recently.

    3. DC

      Oh. [laughs]

    4. MS

      I think this is one of the f- only companies I've ever worked with that is so regulated that they had to have a government strategy pre-product, and they basically had to get licensed before they could do anything. Counterintuitively, funding two MIT CS kids right out of college, where the first thing they have to do is get a license from some-

    5. DC

      It's the CFTC

    6. MS

      ... CFTC, um-

    7. DC

      So they chose to be regulated by CFTC, right? So that was a-

    8. MS

      Well, they ch- they chose, they chose not to go to jail immediately.

    9. DC

      Okay. [laughs]

  4. 4:14 – 5:42

    When law firms won’t help: reading the law, filing yourself, and suing to expand markets

    1. MS

      The fun part of their story is they tried to get a law firm to represent them in applying for this license, and no law firm would work with them 'cause they were like, "You are two MIT kids who are not qualified to do anything." And so, um, similar to a lot of companies we funded, you know, I think about the Brex founders, they're like, "We're just gonna read the law and file the paperwork ourselves." And in about a year and a half, they got their license, and then what was really funny is, like, the law firms that rejected them said, um, "When your company fails," 'cause it's, it's not even gonna work, still, "we'll hire you." And they're like, "What do you mean? Like, we're not lawyers." Like, "You're fine." Like, "We'll just hire you." [laughs] Like, "If you could do this, the legal stuff is not a problem." More recently, during the last election, they were prohibited from listing elections on their prediction marketplace, and so that's when they sued the government. I was in this great board meeting where they're like, "We wanna sue the government." And I was like, "I don't even know how to give you advice on this. You know government stuff, so good luck." And then they emailed, like, two months later. Like, "We won. We get to run elections." And I'm like, "Okay." And then they did it again to be able to have sports. And so one of the very, very few cases where I've seen a startup have an offensive legal strategy against the government, and, uh, it's won great. Most of the time, I think people just kind of sulk in the background, like us or Airbnb or-

  5. 5:42 – 6:39

    Sophisticated regulation plays: new banking charters and crypto rails

    1. DC

      I think low sophistication was more normal back then, but the folks that we're seeing that are good at this are higher sophistication on their strategy around this. Um, one, one of my super recent things is, did you guys see the new bank that Palmer Luckey started that got a de novo banking charter? So the actual CEO of that is a guy I funded at YC. This is his next startup. I can't believe they did it. Again, I would argue this is a different, um, an example ofUnderstanding the regulatory environment and reacting to it quickly, because the idea of being able to get a new banking charter to do crypto for all, you know, crypto rails is totally nuts. Imagine telling your lawyer that a few years ago. Anyway, we-

    2. MS

      We had a company that tried to get a banking license, and it took five years, and they had to buy a small bank.

    3. DC

      Like a physical bank. And so again, high sophistication founders, like the guy that I know, the, the CEO of it, he was doing a heavily regulated crypto thing before, and so very high sophistication on this stuff. And so I think that would generally be the advice I would give to founders.

  6. 6:39 – 7:15

    “Government is open for business”—but don’t anchor to one administration

    1. MS

      Would you go so far as to say whereas historically we might have been a little bit more afraid of companies attacking regulation, now we might be more like, "Hey, the government's open for business?"

    2. DC

      I think you wanna watch out tying yourself too much to any one administration.

    3. MS

      [laughs]

    4. DC

      But in general, high sophistication people taking high risk is often a really good bet. The higher the sophistication, the more you can take very high risk.

    5. MS

      So maybe let's switch topic. Where do we see founders maybe misunderstanding how to use lawyers or misunderstanding how they get value out of lawsuits?

  7. 7:15 – 7:51

    How to get value from lawyers: don’t ask permission, state goals

    1. DC

      Well, okay, there's a few things. Um, number one, it is the job of someone in that role to never be wrong. Um, I would argue that malpractice is when they tell you [laughs] shit that's wrong, right? Therefore, you are always going to get the most cautious advice such that they can't be disproven. And so often our advice to founders on how to work with lawyers is say what you want to accomplish first, versus asking, "Can I do X?" Do you see how there's a difference? You wanna say, "I wanna do X, what should I be thinking about?" 'Cause the lawyer will of course be like, "No, don't do it" if you ask for permission.

  8. 7:51 – 8:51

    The $4M lesson: reframing legal questions can change outcomes

    1. MS

      So that was a $4 million swing in my first company. We were streaming video, and we asked our lawyer, "Can we run ads?" And he said, "Absolutely not. That'd be a violation of the DMCA." We didn't know what that meant, but that sounded really scary. And then I remember we talked to our friends who instead of stealing copywritten video, they were stealing copywritten textbooks. And they were running tons of ads, and they were profitable. And we were like, "What is going on?" And literally one of the founders was like, "Oh, just ask your lawyers, like, how to do it." And then, and then we asked our lawyer, we're like, "How do we do this?" And the guy's like, "You know, actually, now that I think about it, if you're in trouble, monetizing this content doesn't get you in that much more trouble. So go to town." And we were like, "Wow." We clicked a button, and that year we made $4 million the year before we made $0. Of course, we did get sued, so... But I think we would've gotten sued regardless.

    2. DC

      That is correct.

    3. MS

      [laughs]

  9. 8:51 – 10:04

    Lawyers in deals: align on the business intent and leverage

    1. DC

      Um, I think num- number two is like in a negotiation, like we, I'm, we're involved in lots of financings. In my, in my current role, I'm involved in lots of financings, and I have to coach the founders, which is to just tell their lawyers, "Hey, uh, we wanna, we wanna do this deal." Um. [laughs] Does that make sense? 'Cause otherwise they'll just, like, do lawyer stuff and like, "Oh, here's my red lines." Um, and you need to be like, "No, like, just don't, please don't do that." And they'll be like, "Okay." [laughs]

    2. MS

      There's an extension of this that actually I remember we talked about, Nicole and I talked about, which is like your lawyer should know whether you're in a high leverage or low leverage negotiation. And like, it, it's not something that occurred to me. I was like, "Oh, isn't this just like a machine?" It's like, well, you know, if you have six term sheets, there's certain things you can ask for, and if you have one verbal, there may be other things [laughs] you can't. And so I think that that was another piece of advice I ended up giving a lot of founders, like clue your lawyers in on how much leverage you have, and you might be surprised at the things that they say you could ask for. And we see YC companies get crazy things in financings, right?

    3. DC

      Like absolutely nuts things.

    4. MS

      Definitely. Yeah.

  10. 10:04 – 11:22

    Speed bumps vs. existential risk: normalizing lawsuits without ignoring jail-risk

    1. DC

      I think the other vector to think about is understanding what are minor speed bumps on the way to building a good company versus existential issues. This comes up a lot devising companies. So for instance, if you run certain types of businesses, you're inevitably going to get sued for stuff. Like, if you're running like a DoorDash, you know, there's gonna be some litigation. And, um, you just have to learn to not freak out about it if you wanna run that kind of business. And there's some things where if you, if you run into legal issues, it's a real problem, and you gotta, you know-

    2. MS

      Financial crime

    3. DC

      ... get a payroll. Yeah, you're gonna go to jail. And so I, I would always try to have founders get sophisticated around understanding how common and how much it's just part of business to deal with certain types of legal friction versus extremes. Um, something that would happen a lot is sometimes people would get letters from their former employer that were mad that they started a startup.

    4. MS

      F you.

    5. DC

      Do you guys know what I'm saying? And so they would be like, "Oh my God," like, "What's gonna happen?" It's like, eh, don't worry about it.

    6. MS

      [laughs]

    7. DC

      Generally, they were, you know, empty threats and unenforceable non-compete kind of stuff. And so a lot of our job was to tell people, "Don't worry about it." But sometimes there were things like financial crimes where we would be like-

    8. MS

      [laughs]

    9. DC

      ... "You should definitely look into this immediately and drop everything." Yeah, and I think founders don't know the difference between those two things at, at the beginning.

  11. 11:22 – 12:24

    Cease-and-desist as business development: the letter might be an opening

    1. MS

      Just to extend that, I think that one of the things I realized working at so many companies is how many biz dev steals start with a C&D letter. A founder will be like, "I'm under threat. Oh God, I gotta, like, put up the defenses." And I'm like, "No, I think they just wanna talk to you, and the way they talk to you... And it works. Like [laughs] they send you a C&D letter, and it's like it does get your attention. And I, I, I did office hours literally two days ago where, you know, the guy was like, "You know, BMW sent us a C&D letter, and, like, our lawyers say we can fight." And I'm like, "First of all, you're not gonna beat BMW. But second of all, don't you want them to be a customer?" And, and he's like, "Yeah." And I'm like, "Well, this is the g- [laughs] Here you go." And he's like, "But they sent us a C&D." And it's like, no, th- they just wanna talk.

    2. DC

      It's just the beginning of the relationship.

    3. MS

      Yeah, they just wanna talk. That's fine. Like, they could have just sent you a lawsuit. Like, they sent you in... So a letter is the least they could do. And so I think that comes up so many times, like, "Oh God, we got this letter. Aren't we fucked?" And

  12. 12:24 – 15:47

    Startups as risk warehouses: OpenAI, YouTube, and calculated legal exposure

    1. DC

      Now, one other vector for this too that I sometimes would say to people in office hours is that a lot of startups, their entire reason for existence is to absorb risk, to absorb legal risk. Um, so to go on a path down memory lane, so OpenAI was started as part of Y Combinator. It was called Y Combinator Research, and we were part of what that was at that stage in time. And the genesis by which it was created, this is all public information, was that, um, Ilya, which is the researcher who was doing all the good work, wanted to build stuff at Google, and he was not allowed because of lawyers. And, um, I actually interviewed him for the job of co-founder of what became OpenAI, believe it or not, and the entire reason he left Google to build it was because he wanted to get away from the lawyers at Google. And when you think about the ability to actually ship LLMs, you needed to absorb a lot of risk to crawl. Think about all the stuff they crawled without permission. Think about the stuff that they ship that you would never be able to do in dig- big tech. And so the entire industry basically only existed because someone was willing to absorb a great deal of legal risk that their GC would have not allowed at a big tech company. Now it is a big tech company, hilariously. And so when you think about it, I think a lot of economic value is created by just warehousing all the risk in these entities.

    2. MS

      Yeah.

    3. DC

      And like, you know, a lot of times it doesn't work, but often that's where most of the value is created.

    4. MS

      Well, I think that's a perfect example because I think the lawyers were right in both cases.

    5. DC

      Totally.

    6. MS

      I think the lawyers at Google were absolutely right saying, "We're fucked if you do what you're about to do."

    7. DC

      It's true.

    8. MS

      And the lawyers at OpenAI were exactly right saying, "Well, what's the worst they can do to you?" [chuckles] And I think that this is where the founders have to understand the risk-reward ratio.

    9. DC

      How many founders do you talk to? I talk to so many founders that are making a couple million in revenue, and I swear they sound like they're running public companies with, like, shareholders and with, like, a hostile board. They have, like, you know, projections down to the quarter cent. And I'm like, "You're on the risk side. Y- you're, you're, you're not supposed to be safe." And they're like, "Oh, aren't we gonna win by being safe?" I'm like, "Eh." Again, if you look, what's the number one app in the App Store right now? Anybody? Sora. Why is it the number one app in the App Store? Because you can make famous people do embarrassing things. Um, they're definitely violating all sorts of name and likeness stuff, and they're gonna lock it down, but that's why that's popular. [chuckles] And I think you can view a lot of innovation and technology as basically well-thought-out, calculated risks and being willing to deal with it. Uh, last thing on this point. This was, this was the main reason, um, my recollection, uh, from their investors of why YouTube sold to Google is basically Google was willing to deal with all the copyright stuff. As a standalone co- uh, company, they weren't able to absorb it. And again, as, as humans, aren't you glad YouTube exists? Like, I am. Like, it's a really cool thing for the world, but the way they got that from zero to one was to absorb some risk, I think, is one way to say it, right? [chuckles] And it's easy to forget that that was the entire original usage of the thing, just like your company. You know, these days it's a whole different medium than what they bootstrapped it off of.

  13. 15:47 – 17:40

    Morality vs. legality: laws change, but harming people doesn’t

    1. MS

      Justin Bieber was on today. It's funny 'cause I was having this conversation with somebody who was like, "You know, Airbnb screwed up their whole, like, legal thing." And I was like, "Yeah, it's an interesting interpretation of what happened," right? You know, certainly Airbnb's relationships with cities could be better, but, like, on average, I would say that worked. And I would say that, like, having the insight that helping people in the city or anywhere make money from their property was probably a good play and that the regulations would probably end up changing or allowing it if they helped enough people. And I kind of feel like Uber was the same way. It's like if we help enough people, the regulations can change. I think so many times when I talk to founders, they assume that these laws are, like, written, like, in the Bible and, you know, judgment will be passed down in the form of death. And they don't realize that it's just the guidelines we've all come up with to f- try to explain how we should deal with the world that used to exist. And, like, that's it. It's the best we can do. There's no sacredness from man-made laws. Um, they're not sacred at all. And, um, whereas as opposed to, like, if your startup hurts people, that's bad. Like, even if there's no law about it [chuckles] like, it's really bad. So I think I find when founders are on the fence, I often ask them, like, are they making people's lives better? Are they, are they helping people? And then I, I'm way more push them on the risk side. And, like, when they're not helping people, I'm like, "Well, why are you even doing this?" Like, why are we debating the law? Before we wrap up, do you have any funny lawsuit stories you wanna share? Like, stories that at the time made you wanna die, but in hindsight, over 10 years later, you can laugh at.

  14. 17:40 – 20:44

    Two memorable lawsuit stories: Knicks with opposing counsel and NBC’s Olympic ultimatum

    1. DC

      I remember being in New York, and, uh, like, it was with Warner Music Group during the litigation, and we spent the whole day negotiating. And they're like, "Hey, you wanna go to the Knicks game tonight?" And so I went to the Knicks game with the people-

    2. MS

      While they're suing you? [chuckles]

    3. DC

      I don't think they thought it was a big deal.

    4. MS

      [laughs]

    5. DC

      That's how normal... That's-- They were just so used to suing people. They're like, "Oh, you're a good guy. Let's go see the Knicks." How about you, man?

    6. MS

      It was 20 days before the Beijing Summer Olympics, and, uh, NBC had spent, don't quote me on this, but I think it was, like, nine billion dollars for the online streaming rights or something. I got a phone call on a Friday on my cell phone, and this extremely polite woman was like, "I'm the outside counsel for NBC."And we're gonna go to court on Monday and have the judge shut your website down for the entire time of the Olympics. And I'm just calling to let you know." Which is, I think is like... And it's super polite. And it was, it was, it was a great... To be honest, I'm really happy she called. [laughs] And so, you know, we had copyrighting site, content on our site for a while, and we would have had the Olympics for sure. I, I remember being like, one, no copyright owner has ever asked us for anything in this way. Like, this is a very motivational ask. You know, everyone's sending us letters, we're ignoring that shit. So I said, "Hey, is there anything we could do so you won't shut our website down and kill our company on Monday?" And she's like, "You know, I don't even wanna say it, 'cause if you, you couldn't ever do anything like this over a weekend." I was like, "Just try us." [laughs] She's like, "Well, if you built us a whole separate website where we could have our team of 100 people who are monitoring sites all over the internet have access to every one of your live streams, and can one-click file a DMCA takedown, and in real time that stream would be taken over. And if they could have usernames and passwords, and the legal team could get every single one of those DMCA filings, and if you could have that by Sunday, we might consider not shutting your website down on Monday." And I was like, you know what I thought? I was like, "That's actually not that hard." Yeah. [laughs] It's way harder to stream all the Olympics to the whole world than it is to build that website. And so I said, "Okay, what number can I call you on Sunday?" And she gave me a phone number. And then I went to the team who was, like, getting ready to go into their weekend, and I was like, "Guess what we're gonna work on?" [laughs] We built this whole thing for them. I called her on Saturday and Sunday, showed her how to use it. She never called back. She never said, "We're not gonna sue you." She just kinda ghosted me, and we lived. And it was great. [laughs] Good work, Mike. Yeah. [laughs] Best lawyer I've ever interacted with. [laughs] With that, thank you so much. This was a lot of fun. Thanks, everybody. [outro music]

Episode duration: 20:44

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