The logistics of a startup should be easy compared to running a startup. Keep it simple. Complicated equity setups and cap tables cost more money in legal fees and admin time. Pulley has helped over 1,000 founders build their cap table and equity. Here is a tactical guide to getting up and running in just four days.
Day one: Incorporate
Incorporation at the seed stage is now standard. Startups incorporate as Delaware C Corporations with 10,000,000 authorized shares. This is the standard setup when you use services like Stripe Atlas and Clerky.
Post-incorporation, you need to answer a few questions on how to grant equity to founders and future employees:
Determine founder equity split - There is no standard for founder equity split. Some founders split shares equally. Others do 49/51 splits for control. Still others have 80/20 splits because one founder spent an extra year on the idea. A good split is one that all founders find fair. If you can't agree on a split, you should need to have a deeper discussion on whether this is the right team to work alongside for the next 10+ years. Most founder shares are subject to a four-year vest with a one-year cliff on their shares. This vesting schedule aligns incentives to reward founders for creating long-term value. Have a good reason if you plan to deviate from the standard. Investors expect this vesting structure and will ask questions on anything atypical.
Create an equity pool - The standard advice is to set aside 10 - 15% of your shares for employees. An equity pool is not a one-size-fits-all. If you set aside too few shares, you need to pay a lawyer to do the legal paperwork to increase your pool size. If you set aside too many shares, you will receive unnecessary dilution. Work backward from your hiring plan to determine the size of your equity pool. Calculate how many people you need to hire and how much equity you need to grant each to hit your milestones to raise the next round. Add a buffer to this total to reach your equity pool size.
Day two: Get a bank account & set up payroll
First Republic, SVB, and Mercury are all good choices. Traditional banks like Chase or WellsFargo bank also work well. Negotiate for free wire transfers and no fees. After you set up an account, get a credit card for payments. Ramp and Brex are two great options for startups. Set up payroll through Rippling or Gusto as the last step. Don't overthink this, and just get it done. You can always change your setup later.
Day three: Find a good lawyer
Most startups do not need a lawyer at the seed stage. If you are in a regulated industry like healthcare OR need to raise an equity round, a lawyer is very helpful.
There are two types of firms: boutique and large scale. Large firms like Gunderson, Cooley, Orrick, and Wilson Sonsini have hundreds of partners. The partner matters more than the firm. Boutique firms are more cost-effective because they do not have as much overhead. Trusted founders in your industry are the best source of referrals.
Good lawyers do not nickel and dime startups. Most large firms understand that startups are cash-constrained and defer payment for the first $10 - 15k in legal spending. Firms make the majority of their revenue if they raise subsequent rounds and grow. The legal fees for a Series A are $30k -$60k, depending on the complexity.
Use your lawyer wisely to keep legal fees in check at the early stage. Ask for free legal templates for offer letters, employee equity grants, and saas agreements from your lawyer. These templates can also be found on sites like Clerky, CooleyGo, and Pulley.
Common mistake: Many first-time founders make the mistake of deferring to their lawyer as the business expert. Your lawyer's role is not to make business decisions. You are the expert at your business. Your lawyer's feedback should one of many data points you consider when making decisions.
Day four: Game plan fundraising
Fundraising is not free money. Funding = dilution. The goal of raising funding is to hire a team to hit the milestones you need to raise your next round. Work backward from your milestones to determine how much you need to raise.
There are three questions you need to answer before you start fundraising:
What is my valuation? Determining the valuation is an art rather than a science. Your company can be pre-customers and pre-product at this stage. Investors are betting on you and the market to determine whether this will be successful. One way to determine a valuation is to look at the valuations of comparable companies that have raised. Get feedback from trusted friends to test the waters. Pick a number and say your valuation confidently when investors ask. Bay area investors tend to be less valuation sensitive compared to east coast investors.
How much do I want to raise? The amount you raise should depend on how many people you need to hire to hit your milestones. Set low expectations to increase the chance you can close the road. It's better to raise $1m and have demand for $1.5m from investors than to plan to raise $2m and not hit your goals.
Who do I want to raise from? Take funding from professional investors who understand the risks. The chances are that your startup will fail. Don't take your grandparent's retirement money to fund your idea. The specific investor matters less at the seed stage. All investors will likely say they will be very helpful, but their time is limited if they have hundreds of portfolio companies.
There is no standard amount of dilution at the seed. This varies by industry (healthcare is greater dilution because you need to raise more capital) than SAAS. We've analyzed 1,000 cap tables at Pulley at the seed stage and most startups give away 15-20% of their company at the seed stage. Calculating dilution across multiple rounds is complicated. Use software like Pulley to understand how much of your company you're giving away.
As originally seen in TechCrunch: https://techcrunch.com/2021/06/09/how-to-start-a-company-in-4-days/
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