Lecture 18 - Legal and Accounting Basics for Startups (Kirsty Nathoo, Carolynn Levy)

Lecture Transcript: http://genius.com/Kirsty-nathoo-lecture-18-mechanics-legal-finance-hr-etc-annotated There's a lot that goes behind the scenes in running a startup. Getting the legal, finance (equity allocation, vesting), accounting, and other overhead right will save you a lot of pain in the long run. Kirsty Nathoo, CFO at Y Combinator, and Carolynn Levy, General Counsel at Y Combinator, cover these very important topics in this lecture. See the slides and readings at startupclass.samaltman.com/courses/lec18/ Discuss this lecture: https://startupclass.co/courses/how-to-start-a-startup/lectures/64047 This video is under Creative Commons license: http://creativecommons.org/licenses/by-nc-nd/2.5/

Carolynn LevyhostKirsty Nathoohost

Nov 19, 201448mWatch on YouTube ↗

WHAT IT’S REALLY ABOUT

Avoid startup legal and accounting pitfalls with standard, simple mechanics.

Form a standard Delaware C-Corporation and avoid “fancy” structures that create massive downstream legal costs.
Split founder equity with execution in mind (often close to equal), then properly document stock purchase, vesting, and the critical 83(b) election.
Raise money using standard instruments (SAFEs/notes) while understanding dilution, valuation caps, and common investor terms like board seats, pro rata, and information rights.
Treat the company as a separate entity: use a company bank account, track and justify business expenses, and keep receipts and signed documents organized for diligence.
Run payroll correctly for founders and employees, classify workers properly (employee vs contractor), and handle terminations quickly and professionally to reduce legal and operational risk.

IDEAS WORTH REMEMBERING

5 ideas

Default to a Delaware C-Corp and keep formation “vanilla.”

Delaware is the investor-friendly standard with settled law; deviations (e.g., odd LLC setups or botched conversions) can surface years later and cost enormous legal fees during financing or acquisition diligence.

Equity should reflect future execution, not past contributions or “the idea.”

YC views heavily uneven founder splits as a red flag signaling misalignment or unspoken expectations; the highest-value YC companies overwhelmingly avoid significantly disproportionate splits.

Talking about ownership isn’t enough—founders must actually buy and document stock.

Founders should sign stock purchase agreements, ensure IP is assigned to the company as consideration, and maintain clear separation between personal actions and corporate actions.

File the 83(b) election immediately and keep proof forever.

Failing to file (or failing to prove filing) can create severe tax consequences and has “blown up” financings and acquisitions because it’s difficult or impossible to retroactively fix cleanly.

Use standard fundraising docs, but still model dilution and choose investors carefully.

Unpriced rounds (SAFEs/notes) are fast, but valuation caps can lead to large effective ownership on conversion; lots of small, unsophisticated checks can create future friction (e.g., investors wanting money back).

WORDS WORTH SAVING

5 quotes

This is probably the class that will save you the most pain.

— Carolynn Levy

Make sure that you do know better than to form your startup as a Florida LLC.

— Carolynn Levy

Four different law firms were needed… and the bill right now is at $500,000 for a conversion mistake.

— Carolynn Levy

Execution has greater value than the idea… ideas… have zero value.

— Carolynn Levy

Working for free is against the law.

— Carolynn Levy

Delaware incorporation and standardizationCorporate setup documents and IP assignmentFounder equity splits and alignmentRestricted stock, vesting, and 83(b) electionSAFEs/convertible notes, valuation caps, dilution mathInvestor terms: board seats, advisors, pro rata, information rightsPayroll, taxes, worker classification, and firing best practices

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