I recently attended a useful talk by Scott Walker on the biggest legal mistakes start-ups make. I had been exposed to many of these concepts before, and it was useful to hear someone talk about them in depth. This was part one of a two-part series of talks. The following is not meant as legal advice; it's just notes I took on Scott's talk.
1. Your employer has ownership to your IP
-If you're using your employer's facilities
-If your outsourced development company keeps your IP and doesn't properly transfer it to you
2. Choosing the wrong entity
-If you need venture funding, you really should be a corporation in Delaware.
-S or C corp is the only decision to make.
-"Qualified small business stock": if you start as a C corp, you get a big tax break (0 capital gains up to $10M if hold the stock for 5 years). You can't get this if you convert to a C corp. This is from IRS Sec. 1202.
-Use an S corp if want to put in your own money for a while and want to take tax losses early on.
-If you're bootstrapping, an LLC can be fine.
-Sec 1244 gives $50K of deductions for C corps.
3. Splitting equity foolishly
-Equal split is the most common and biggest mistake.
-It should depend on levels of involvement in past and future and value each person brings.
-Biggest business decision you'll ever make: who is your co-founder (Scott said 2 is the best number of founders; he said YC and TechStars require it)
4. Not setting up a vesting schedule
-Done through a Restricted Stock Purchase Agreement
-Typically vest shares over 4 years on a monthly basis
-1 year cliff: nothing vests if fired or leave in the first year
-Can sometimes pre-vest or accelerate in certain circumstances
-VCs will always set up vesting schedules for the team
-Your accountant needs to file an 83b election with the IRS.
5. Not complying with securities laws
-You can't raise money on social media.
-You can't advertise or solicit.
-You must build relationships directly.
-Investors want to see resourcefulness and tenacity of an entrepreneur in networking.
-You must get "accredited investors."
I recently had the pleasure of reading Decoded by Jay-Z, his cross between an autobiography and "decoding" of his rap lyrics. I was lucky enough to read the AV "enhanced" Kindle version, which featured several videos of Jay-Z talking about the songs and bringing the stores in the book to life. (I only wish it had more "behind the scenes" of his actual singing and music videos, but just hearing him speak and riff on the lyrics was cool too.)
Jay-Z says he had three goals with the book. The first goal was to make the case that hip-hop lyrics (not just his lyrics, but those of every great MC) are poetry if you look at them closely enough. (I got a kick out of reading that because I've been telling my friends that for a while myself.) The second goal was to tell a little bit of the story of his generation and show the context for the choices they made. The third goal was to show how hip-hop created a way to take a very specific and powerful experience and turn it into a story that everyone in the world could feel and relate to. All three messages came across clearly in the book.
The book alternated between prose and lyrical decomposition -- breaking down line by line (and often word by word) with footnotes describing the double and sometimes triple meanings behind the lyrics. I was amazed to see so much that I had missed from more cursory listening.
I also learned a lot of interesting things about Jay-Z's life. His dad left his family when Jay-Z was very young, and though he did reunite with him, it was a very traumatic childhood. He saw his first murder at age 9 and would routinely wake up to the sound of gunshots in the New York Projects housing where he lived.
He grew up hustling (selling drugs) on the streets and traveling all over the state to make a living. While doing this since a young age, he would write rhymes almost non-stop, stopping in the middle of crosswalks and noting down rhymes on paper bags. He couldn't stop the rhymes from coming into his head. He spent considerable time traveling around and rapping for others too, trying to get his break into the music industry, which never treated him well.
In the end, he became a true entrepreneur. He risked all his capital and resources and pooled them with a friend to start his own label (Roc-A-Fella). This was the only way he could produce the music he wanted. He did the same thing for clothes. He saw what a large effect rap was having on the sales of other goods (like Cristal champagne), and when he wanted to team up with brands to cross-promote, no one would support him. He did the same thing with clothes as he did in music: he went out on his own and started Roc-A-Wear, a highly successful clothing company.
Throughout the book, Jay-Z points out how people are naive and take his lyrics at only a surface level, thinking that all he says is true and how he feels. He says that he writes songs like authors write books and screenwriters write movies: they are stories meant to convey a message. In the same way you don't expect Matt Damon to be a spy in real life, the stories that Jay-Z sings in the first person are similarly pure narratives meant to grab attention but not actually cause you to believe every word.
There was a lot of awesome stuff in the book, and below are some of my favorite quotes:
This is my last post in the series about my classes last quarter. It's about my main takeaways from my HR elective class on pay and rewards in organizations. The course surveyed empirical research studies on a variety of topics including executive compensation, pay for performance, start-up compensation, and pension plans. A lot of the points below are taken from the articles or studies that we looked at as well as our professor's notes.
We learned that pay is determined by three main forces: the labor market, business strategy, and employee motivation/culture.
One research model we studied suggested the following tips:
Delving into employees' intrinsic rewards, we looked at how the practice of "job sculpting," where employees will stay with and be retained by organizations only if their jobs match their "deeply embedded life interests." These do not determine what people are good at; they drive what kinds of activities make them happy. These deeply embedded life interests are mostly the following:
People can sometimes concentrate on one or a combination of these life interests, which ultimately determine which jobs make them happiest.
The seven “HR Best Practices” (or high-performance work system practices) we studied were the following:
In terms of executive compensation, we learned from the research that the use of long-term contingent compensation results in significant windfalls for CEOs and is not consistent with the idea that such compensation exposes executives to risk; in addition, cash compensation for CEOs is not reduced when contingent compensation is granted (thus the latter is a perk); and in the end, firm performance is lower among firms that heavily use long-term contingent compensation for CEOs. The remedies to this include requiring reduction in CEO pay when options are paid and shifting to more emphasis on annual cash pay adjustments (as well as finding CEOs more motivated by themselves than through compensation).
The class was informative, and I found the discussions about employee culture and motivation (as well as how compensation can be used strategically in start-ups) to be the most interesting.